LONDON – After Tuesday’s (June 13, 2023) labor market statistics revealed rising wage growth, the yield on short-dated government bonds in the United Kingdom increased above levels last seen after Britain’s market-destabilizing “mini-budget.”
The yield on two-year gilts was up 23 basis points to 4.876% at 4:40 p.m. London time, according to Refinitiv data, surpassing the 4.75% set on Sept. 28 and marking the highest level since July 2008.
U.K. annual average wage growth excluding bonuses accelerated from 6.7% to 7.2% in the February-April quarter, the fastest rate on record. Economists polled by Reuters had expected 6.9% wage growth for the reported first period since the national hourly minimum wage was increased to £10.42 ($13.1), from £9.50.
Real pay, adjusted for inflation, showed pay growth was down by 2% including bonuses, and by 1.3% excluding them.
The British Office for National Statistics’ study revealed that during the same time period, the employment rate increased by 0.2 percentage points as the number of individuals in employment reached a record high. Due to a decrease in the number of “economically inactive” people who are neither working nor looking for job, unemployment increased by 0.1 percentage points.
On the basis of the data, economists predicted a large increase in gilt yields, which raised hopes that the Bank of England would raise interest rates.
Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, said the numbers were “fanning the impression that the U.K. has a unique problem with ingrained high inflation.”
The central bank is attempting to tame price rises that are among the steepest of all developed economies, coming in at 8.7% in April.
“While we think next week’s inflation print will be softer and, more broadly, we see inflation releases ahead of the August meeting as more in line with the BoE’s expectations from May, the April beat and today’s Labour Force Survey beat imply more hikes will be needed,” said Bruna Skarica, U.K. economist at Morgan Stanley.
It comes as markets price in a more than 81% chance the U.S. Federal Reserve will opt to pause rate increases at its meeting this week, according to the CME FedWatch Tool.
The “mini budget” crisis in gilts that sparked chaos in the mortgage market and threatened to topple pension funds occurred after former Prime Minister Liz Truss and former Finance Minister Kwasi Kwarteng’s announced a package of unfunded tax cuts in September last year.
