Strong wage growth pushes gilt yields above mini Budget levels
By Abigail Townsend
Date: Tuesday 13 Jun 2023
(Sharecast News) - Gilt yields spiked on Tuesday, as strong wage growth data pointed to further interest rate hikes.
Two-year gilt yields reached 4.73%, the highest since they peaked at 4.61% in the aftermath of the government's disastrous mini budget last autumn.
Yields were moving in response to data from the Office for National Statistics, which showed average private sector wages excluding bonuses were 7.6% higher year-on-year in the three months to April, the fastest pace of growth outside of the pandemic. Average public sector wages were 5.6% higher.
Combined with stubbornly high inflation, the data compounded growing market expectations for further interest rates rises, as the Bank of England struggles to bring down inflation and ensure it does not become embedded.
Most analysts expect the cost of borrowing - currently at 4.5% following 12 rises in 18 months - to finish the year at around 5.5%.
Neil Wilson, chief market analyst at Markets.com, said: "We are now in wage-price spiral territory. This only makes it harder for the BoE to cool inflation - a tougher stance is required but we know the dangers for the economy and notably the mortgage market if that happens."
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The renewed pick-up in wage growth in April will add fuel to the recent rise in gilt yields and expectations for the future path of the bank rate, by fanning the impression that the UK has a unique problem with ingrained high inflation."
Russ Mould, investment director at AJ Bell, said: "We could be looking at higher rates for longer, with all the negative implications that has for the housing market and consumer spending. In such a scenario, the risks of a UK recession now have to be significantly higher."
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