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Wage rise raises chance of further interest rate hike

Pay-wage-slip

Figures showing wage inflation rising, but getting close to its peak, may prompt the Bank of England to raise rates again before pausing, says an economist.

Pay (excluding bonuses) rose by 6.7% in the final quarter of the year, the strongest growth rate for 20 years.

But when adjusted for inflation growth fell by 3.1% for total pay and 2.5% for regular pay (excluding bonuses).

The finance and business services sector saw the largest regular growth rate at 7.4%, followed by the construction sector at 6.1%.

The rate of UK unemployment increased to 3.7% in the three months October to December from the previous three-month period.

The data will influence the Bank of England’s interest rate setting monetary policy committee (MPC).

Martin Beck, chief economic adviser to the EY ITEM Club, said: “The latest numbers mean the odds of the MPC going for one further rise in bank rate in March, before pausing, have likely increased.

“Granted, the jobs market is a lagging indicator, so could turn down more significantly in coming months.

“However, continued recruitment difficulties suggest employers may hold onto labour rather than cutting headcounts, and while recent Bank of England survey evidence suggests pay growth may have peaked, the MPC may want more reassurance from the hard data before it changes tack on policy.”

James Bentley, Director of Financial Markets Online, said: “America’s inflationary dragon is far from slain. While today’s CPI numbers came in largely on expectations, many marketwatchers are disappointed at just how sticky US inflation has become.

“Amid all the post-data headscratching, two things were clear. US inflation is heading in the right direction, but too slowly for the Federal Reserve’s liking. And as a result no-one should expect a doveish takeover in the Fed any time soon.

“January’s huge jobs print took the markets by surprise and showed that America’s economy is generating new jobs at a prodigious rate. That labour market momentum gives the Fed’s ratesetters a free hand to hike interest rates further and faster if they deem it necessary.”

Chancellor Jeremy Hunt said: “In tough times unemployment remaining close to record lows is an encouraging sign of resilience in our labour market.

“The best thing we can do to make people’s wages go further is stick to our plan to halve inflation this year”.

The Treasury said unemployment is higher in Canada, France, Italy, Spain, and the Euro area, while employment is lower in the US, France, Italy, Spain and the Euro area.

There were more than 30 million employees on UK payrolls in January 2023, over a million above pre-pandemic levels.

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