UK Wages Rise at Fastest Pace Since 2009 as BoE Prepares for Latest Rate Decision

- Wages rose in March, at their fastest pace since 2009 say IHS Markit.

- Job security improved in March, to levels not seen since 2009.

- Inflation expectations have eased from the four-year peak seen in January.

- Wage data could be significant for the Bank of England this Thursday.  

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The outlook for Pound Sterling brightened Monday when an IHS Markit survey showed a rapid rise in wage pressures during the current month, which is sure to grab the attention of Bank of England rate setters later this week.

UK wage packets are rising at their fastest pace since February 2009, according to the IHS Markit Income from Employment index, which rose from 50.7 in February to 52.3 in March.

“Higher earnings and the prospect of steadily falling inflation seems to have helped put clear water between the financial squeeze in March and the lowest point seen last summer,” says Tim Moore, associate director at IHS Markit. “Incomes from employment were reported to have picked up at one of the fastest rates since 2009, especially among those aged 25-34.”

The data comes within the monthly IHS Markit Household Finance Index, which rose to 43.1 in March, up from 42.4 in February. A reading above the 50 level indicates an improvement in household finances during the month while a number below, denotes a deterioration.

“March’s survey data indicates a less downbeat mood among UK households compared to earlier in the year, suggesting that sentiment has started to turn the corner after the worst period for financial wellbeing since 2014," says Moore. 

Separately, concerns about job security also fell to their lowest level in around nine years during the month. This was the result of a moderation in job insecurity among public sector workers, particularly those in education, health and social care.

This had a lot to do with the March movement in the IHS Markit index of job security, which rose from 47.2 in February, to 48.8 in the current month.

IHS Markit says UK households "remained downbeat about their job security" in March overall, but notes that this is the highest level for the job security index since the survey began in early 2009.

“UK households are the least gloomy about their job security for at least nine years, which provides a further indication of tight domestic labour market conditions,” Moore remarks.

The UK labour market has remained in a robust condition during recent years, despite the often-lamented uncertainty thrown up by the Brexit vote in June 2016. By some accounts, the economy could already be at what is described as “full employment”.

Britain’s unemployment rate fell from 8.5% in 2011 to 4.3% in July 2017, its lowest level since 1975, although it ticked up a notch to 4.4% in December 2017. The unemployment rate was 4.9% in June 2016, the month of the Brexit referendum.

The BoE reduced its estimate of the “equilibrium rate of unemployment” in February 2017, cutting it from 5% to “somewhat below” 4.5%.

Policymakers use estimates of the equilibrium rate to predict changes in wage pressures. Any meaningful fall beneath the equilibrium rate can be expected to lead to upward pressure on wages.

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Bank of England In Focus

The income data comes one month ahead of an expected increase in the national living wage, which may have impacted the figures, although current high inflation has seen economy-watchers flagging a likely increase pay for some time now.

Wage pressures are a key driver of inflation while it is these subsequent consumer price pressures that the BoE is attempting to manipulate when it tinkers with interest rates.

The BoE is obligated to ensure the consumer price index remains below but close to the 2% threshold, although it has spent the last five months at or above the 3% level.

It was this above-target inflation that prompted the BoE to raise interest rates in November, for the first time in a decade, and it could yet prompt the Bank to act again. The Bank rate currently sits at 0.5%.

The BoE warned in February that it will raise interest rates faster than markets had been expecting if the inflation outlook evolves in line with its latest set of forecasts. It predicts the consumer price index will remain above the 2% target until at least the end of the first quarter 2021.

“The strength of the survey’s employment figures in March is an advance signal that wage pressures are starting to build. While higher salary payments will help offset sharply rising living costs faced by consumers, it also adds to the likelihood of additional interest rate rises in 2018,” says Moore, at IHS.

Bank of England rate setters are due to announce their latest monetary policy decision Thursday 22, March at 12:00 pm.

Few economists expect the Bank to raise rates in March but the latest developments on wages could inject a more hawkish bent into the BoE’s rhetoric this week, which would have positive implications for Sterling.

The Office for National Statistics will announce its own measure of UK wage growth, covering the three months to the end of January, this Wednesday.

Pricing in interest rate derivatives markets, which enable investors to hedge against changes in interest rates while also providing insight into expectations for monetary policy, implies a 60% chance of an interest rate rise at the BoE’s meeting in May.

This suggests an hefty bet by the market that the BoE will act soon although there is still some way to go before another rate hike becomes fully priced into derivatives, and presumably, currency markets.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.

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