Pay rise surprise leads to forecasts of higher interest rates

UK wages have risen at their fastest rate in 20 years, excluding the pandemic, raising expectations that UK interest rates will have to rise.

Regular pay excluding bonuses increased by 7.2% in the three months to April, although it still lags behind inflation - the rate at which prices rise.

The Bank of England has warned big pay rises are contributing to the UK's still-high rates of inflation.

It has put up interest rates 12 times since 2021 to try to slow price rises.

Higher interest rates may be good for savers, but are driving up repayment costs for millions of mortgage holders.

And fears the Bank of England will raise interest rates higher than previously thought - from their current 4.5% to as high as 5.5% - have been causing turbulence in the mortgage market.

Lenders have been putting up rates and pulling hundreds of deals, causing uncertainty for borrowers.

On Tuesday, the government's borrowing costs - which directly impact mortgage rates - rose to their highest rate since last year's mini-budget.

Samuel Tombs, chief UK economist at Pantheon Economics, said the renewed pick-up in wage growth would "add fuel" to expectations for higher interest rates.

This was because the figures were"fanning the impression that the UK has a unique problem with ingrained high inflation".

Darren Morgan, director of economic statistics at the Office for National Statistics (ONS), said in cash terms, basic pay is now growing at its fastest since current records began, apart from the period when the figures "were distorted by the pandemic".

"However, even so, wage rises continue to lag behind inflation."

According to the ONS, pay when adjusted for inflation fell by 1.3% in the three months to April.

• How worried should we be about mortgage rates?

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The rise in the minimum wage had had a "significant" impact on the April pay figures, said Andrew Hunter, co-founder of the job search engine Adzuna.

The minimum wage - known as the National Living Wage - rose to £10.42 an hour in April for those aged 23 and over.

"Nearly two million workers in the UK saw an almost 10% increase in pay this spring," Mr Hunter told the BBC's Today programme.

Workers in multiple industries have held strikes since last summer as pay rates fail to keep pace with inflation. But the gap is narrowing as inflation starts to fall.

The Bank of England has warned sharp pay rises are likely to prolong the UK's still-high rates of inflation. The cost of living rose by 8.7% in the year to April, more than four times the Bank's 2% target.

Mr Hunter said: "Your average worker will be delighted that their pay on average is going up, but that's not necessarily a good thing for inflation."

The Bank of England governor, Andrew Bailey, told the House of Lords economic affairs committee that the latest figures on jobs showed the the labour market was "very tight".

"We've had a fall in the supply of labour, which is showing signs of recovering, but very slowly, frankly," he said.

"One of things firms pretty much universally say to me and have been saying to me for a little while, is that they find it so hard to recruit labour in the current market, they are not going to release labour."

The market interest rate for the UK government to borrow money over two years is now effectively higher than it reached in the aftermath of Liz Truss's mini-budget. It is also the highest level for a decade and a half and now clearly higher than seen for the US government.

The fact that this is not the same market panic as last autumn will come as little respite to many people renewing their mortgages.

All this reflects market expectations that the UK has a specific problem with stubborn and sticky inflation that will require higher interest rates for longer. Some market bets now see a half percentage point rate rise next week, and rates settling closer to 6% than 5% at the end of the year.

There is an important difference to the mini-budget aftermath. The moves are being seen mainly in short-term rates. The real problem last autumn was for longer term 10- and 30-year borrowing, which saw significant moves in yields, the result of a loss of market confidence in the then-government's tax and spend plans. Current rates for such long-term borrowing are still well below that market panic.

Today's move is more like a steady squeeze as the markets come to terms with the idea of the Bank of England keeping rates higher for longer had been expected, and above rates seen in similar economies.

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Figures from the ONS also showed that:

• The UK unemployment rate dipped slightly to 3.8% from 3.9% in the three months to April

• The number of people not working due to long term sickness hit a fresh record of almost 2.6 million

• The number of people in work hit an all-time high of 33.1 million.

The UK economy is currently struggling to grow as the soaring cost of living and rising interest rates squeeze households. But the jobs market remains resilient.

Chancellor Jeremy Hunt said: "Rising prices are continuing to eat into people's pay cheques - so we must stick to our plan to halve inflation this year to boost living standards."

However, Labour's shadow chancellor Rachel Reeves said: "Family finances are being squeezed to breaking point by a further fall in real wages, and record numbers of people are out of work due to long-term sickness."

Tips for asking for a pay rise

1. Choose the right time - Scheduling a talk in advance will allow you and your boss time to prepare, and means you're more likely to have a productive conversation.

2. Bring evidence - If you're asking for a pay rise, you should have lots of evidence of why you deserve one.

3. Be confident - When asking your boss for more money, it helps if you're confident and know your worth.

You can read tips from careers experts in full here.