Record wage growth dashes hope of respite from interest rate pain
Mortgage holders were dealt a blow today as stronger than expected wages growth dashed hopes that nearly two years of relentless interest rate rises could be almost at an end.
Fixed rates had been drifting down wards over recent weeks following the better than expected June inflation figure with most major lenders cutting their prices.
But today’s record 7.8% jump in aver age basic pay — 8.2% if bonuses are included — sent gilt yields, the pound, and market rate expectations jumping.
By mid morning the yield on the two year benchmark gilt — a key indicator of the direction of fixed mortgage rates — was seven basis points higher at around 5.13%.
Markets now overwhelmingly expect a further hike to 5.5% when the Bank of England’s Monetary Policy Committee meets next month.
Today the average two-year fixed rate stood at 6.79%, unchanged on yesterday, according to latest date from analysts Moneyfacts.
The average five-year rate was also static at 6.28%. John Choong, equity and markets analyst at investing comparison plat form, InvestingReviews.co.uk, said: “June’s significantly stronger-than-ex pected wage growth numbers will delight Britons as pay finally catches up with inflation. However, the market won’t share the same sentiment.
“The widespread optimism of a lower terminal rate is now in jeopardy after four weeks of smooth sailing. Gilt yields had plummeted and mortgage lenders were battling for market position by cutting fixed rates en masse, but all that is now at risk of getting undermined.
“Nonetheless, bleak as it may be, the unemployment rate rising to 4.2% along with a drop-off in vacancies may be the very thing that stops the Bank of England from hiking rates by 0.5% at its next meeting.”
Significantly the jump in wages means that by some measure workers are now getting better off in real terms for the first time in around a year and a half. By comparison with the CPIH meas ure of inflation, which includes owner occupiers’ housing costs, regular pay rose by 0.1%, and total pay including bonuses by 0.5%.
The headline rate of inflation, CPI, is still slightly higher than wage growth at 7.9% but the figure for July — being revealed tomorrow — is expected to be substantially lower.
Danni Hewson, head of financial anal ysis at brokers AJ Bell, said: “Workers will be delighted by the latest jobs data which shows that wages are finally at a tipping point. After months and months of agonising as swelling pay packets simply couldn’t keep up with scorching price rises, the gap between the two has almost vanished.
