UK wages grow at a record pace

UK wages grew at a record pace in the quarter through June, making it more likely the Bank of England (BoE) will hike interest rates again when it next meets. 

Annual growth in regular pay, excluding bonuses, was 7.8% between April to June 2023 - the highest regular annual growth rate since records began in 2001. 

Annual average regular pay growth for the private sector was 8.2%, the largest annual growth rate seen outside the pandemic. 

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Annual growth including bonuses was 8.2% in the same time period. While this is good news for consumers, it introduces a fresh headache for the BoE’s rate-setting Monetary Policy Committee (MPC). 

“Finally, we’ve stopped getting poorer with each passing month, as wages have returned to growth after inflation,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.  “However, this is the bright spot among a fairly dismal employment picture, and even this could bring more bad news further down the line.

We look into what effect this data will have on interest rates.

How do rising wages affect interest rates?

The BoE base rate is currently sitting at a 14-year high of 5.25%. While the jump in wages will be a big relief for consumers, “it will be far less welcome for the Bank of England”, says Coles. 

“Since the period of higher inflation started, there was always the risk that wages would need to rise to help people make ends meet and that it would end up fuelling even more inflation.

The figures could mean “we may well see another rate rise when the committee next meets,” adds Coles. “This raises the prospect that it could exacerbate growing weakness in the jobs market.”

‘’The blast of cold air from higher interest rates is being felt in the labour market, with unemployment ticking up but the risk is that the growth in wages will continue to fan the fires of inflation,” adds Susannah Streeter, head of Money and Markets at Hargreaves Lansdown. “With the highest annual wage growth recorded in June since records began in 2001, another rate hike from the Bank of England looks bolted on in September.”

Unemployment rate grows

Meanwhile, the unemployment rate between April to June increased by 0.3% to 4.2% – its highest level since 2021. 

“Inactivity due to long-term sickness rose to a record high and job vacancies fell by 66,000, dropping for the 13th consecutive period,” says Victoria Scholar, head of investment at interactive investor. 

“Amid the macroeconomic storm clouds, businesses have become increasingly cautious about their hiring plans, reducing the level of vacancies which has made it more difficult for workers to find jobs, raising the unemployment rate,” adds Scholar. 

“On top of that there’s a record number of people unable to work due to long-term sickness, perhaps pushed up patient backlogs and other pressures on the NHS.”

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