Pound Sterling Rises Amidst Signs UK Wages will Begin to Accelerate

Markets will now have one eye on the Bank of England after Wednesday's labour market data reinforced expectations that a pickup in wages is underway.

The British Pound edged higher against the Euro and US Dollar Wednesday after the latest round of UK wages and unemployment data from the Office for National Statistics drew in a renewed bid for the currency.

Markets had been watching closely for continued signs of life in UK wage packets, given that rising pay would be likely to see the Bank of England raise interest rates faster than is currently envisaged, and they were not left disappointed.

UK wages grew by 2.4% during November, when compared with October, which was a faster than expected pace than the 2.3% growth forecast by economists. Over the three months to the end of November wage packets grew in line with expectations, rising by 2.3%.

This represent a one-year high for wage growth. That wages are growing should come as no surprise as the UK economy continues to add jobs and shrink the pool of available talent.

The ONS report the unemployment rate held steady at 4.3% during November, a four-decade low as the number of people in work rose by 102K in the three months to November. However, and on the downside, new unemployment claims rose by 8,600 during the month when economists had forecast a more meagre 2,600 rise. Yet this is of little concern considering employment remains at record levels.

"With surveys suggesting recruitment difficulties are building and the latest pay settlements surveys also strong, a further acceleration in wage growth is in prospect. As a result, we continue to think that the MPC will hike rates three times this year, much more than markets expect – with the next hike coming in May," says Paul Hollingsworth, a senior UK economist at Capital Economics.

This is an expectation shared by Nikesh Sawjani, UK Economist with Lloyds Bank:

"Surveys of hiring intentions and, more broadly of, economic activity suggest that demand for labour should remain strong over the coming months. Alongside, evidence from pay settlement reports, these factors suggest that wage growth should show further signs of acceleration."

The promise of higher wages suggests organically-generated inflation in the UK economy should remain robust over coming months which in turn keeps the pressure on the Bank of England to raise interest rates.

Indeed, Bank of England policy-setter Michael Saunders said last week that he sees interest rates rising over coming months as the UK workforce starts to demand more pay.

And an offshoot of higher UK interest rate expectations is a stronger Pound.

The Pound was quoted 0.61% higher at 1.4096 against the Dollar after the release Wednesday, a post-referendum high, while the Pound-to-Euro exchange rate was marked 0.33% higher at 1.1419.

November’s labour market data comes just days ahead of the fourth quarter GDP number, which will show whether or not the UK economy slowed again in 2017.

Quarterly economic growth picked up a touch in the third quarter of 2017, rising to 0.4% from the more meagre 0.3% growth seen in the first two quarters of the year.

A surge in inflation since the Brexit referendum, which has taken the CPI index above the 3% threshold for the first time in nearly five years, has been closely linked with the slowdown in real GDP.

Rising consumer prices have themselves resulted from the fall in the Pound brought about by the referendum, which has raised the cost of imports for companies and consumers.

November saw the Bank of England raise interest rates for the first time in a decade as part of an effort to combat this rising inflation. Speculation ahead of the move delivered an instant boost to Sterling.

This recovery of the Pound has continued during the subsequent weeks, with Sterling notching up noteworthy gains over the US Dollar and other currencies, while holding broadly steady against the Euro.

The Pound's recovery, when combined with the lapse of time since the referendum, should eventually serve to reduce inflation and downward pressure on UK economic growth.

Further interest rate rises from the Bank of England will be contingent on many things but included among those that are likely to prompt a reaction from rate setters are sharp rises in wages, a rapid pick up in the pace of GDP growth and, or, inflation that remains stubbornly above the 2% target.

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