UK wages are rising at a record pace. That makes higher interest rates more likely

LONDON — Wages in the U.K. are rising at a record high rate amid stubbornly high inflation, official figures showed Tuesday, bolstering expectations that interest rates will increase again — to the worry of homeowners who are seeing their mortgage payments spike.

The Office for National Statistics said wages, excluding bonuses, rose by 7.3% in the three months to May, matching the highest rate since records began in 2001. The private sector was the main driver behind the increase.

For months, workers have been seeking pay that keeps pace with high inflation, which is running at 8.7% despite declines in energy prices and a series of interest rate hikes from the Bank of England.

The central bank has been raising rates since late 2021 to get a grip on rising prices, which were first stoked by supply chain problems caused by the coronavirus pandemic and then Russia’s invasion of Ukraine, which sent energy and food prices surging.

The bank lifted its main interest rate by half a percentage point to a 15-year high of 5% last month and warned of further increases if inflation fails to show signs of falling back toward its target of 2%. By making borrowing more expensive, the bank is trying to keep a lid on spending, which should get inflation down.

But with unemployment low, workers have been able to demand higher pay as inflation erodes their spending power, threatening to further fuel price spikes. That's despite the jobless rate rising to 4%, when economists had anticipated an unchanged reading of 3.8%.

“Soaring wage growth …. gets us into the kind of wage-price spiral dynamics that central banks absolutely hate and usually do anything to avoid,” said Neil Wilson, chief markets analyst at Markets.com.

The new wages data cemented expectations that the bank will lift its key interest rate to 5.25% next month, possibly to 5.5%. That was evident in the fact that the pound rose after the figures were released to a 15-month high against the dollar of $1.29.

Expectations of higher borrowing rates are having a knock-on effect across lending markets, particularly in the housing market. For example, the average two-year fixed mortgage rate rose to 6.66% on Tuesday, according to financial information company Moneyfacts. That's a level not seen since unfunded tax cuts announced by the government last fall spooked investors.

Households whose fixed-rate terms expire over the coming months — numbering more than 1 million — will face much higher borrowing rates when they look to lock in new deals. Homeowners who are renting out properties also will be tempted to pass on their higher mortgage costs to tenants.

Sourse: abcnews.go.com

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