According to official figures released on Tuesday, wages in the UK have experienced an unprecedented surge, further fueling expectations of an increase in interest rates. The surge in wages, combined with persistent high inflation, has raised concerns among homeowners who are grappling with rising mortgage payments.
The Office for National Statistics reported that wages, excluding bonuses, rose by 7.3% in the three months leading up to May, matching the highest rate since records began in 2001. The private sector played a significant role in driving this increase.
Workers have been demanding higher wages to keep pace with soaring inflation in the UK. Which currently stands at 8.7%, despite recent declines in energy prices and a series of interest rate hikes implemented by the Bank of England.
The central bank has been gradually raising interest rates since late 2021 in an effort to control escalating prices. Supply chain disruptions caused by the COVID-19 pandemic and Russia’s invasion of Ukraine have contributed to inflationary pressures, leading to a surge in energy and food prices.
Last month, the Bank of England raised its main interest rate by half a percentage point to 5%, marking the highest level in 15 years. It also cautioned that further rate hikes may be necessary if inflation fails to show signs of receding towards the target rate of 2%. By making borrowing more expensive, the bank aims to curb spending and rein in inflation.
Unemployment and demand for higher wages
However, despite attempts to control inflation, workers have been successful in demanding higher wages due to the erosion of their purchasing power caused by rising prices. This trend threatens to exacerbate price increases, even as the unemployment rate increased to 4% instead of the expected 3.8%.
The latest wage data has solidified expectations that the Bank of England will raise its key interest rate to 5.25% next month, with the possibility of further increases to 5.5%. This sentiment was reflected in the currency market, as the pound surged to a 15-month high against the dollar, reaching $1.29.
Anticipated higher borrowing costs are having a ripple effect across lending markets, particularly in the housing sector. Homeowners are bracing for the impact of increased mortgage rates as a result of rising interest rates.