Borrowing costs in the U.K. have risen above the levels hit during Liz Truss’s stint as prime minister, despite stronger-than-expected job and salary reports, which had reinforced expectations that the Bank of England could raise interest rates.
Bank of England head Andrew Bailey said inflation was “taking a lot longer” than hoped to come down. According to a report by The Guardian, Bailey told the House of Lords Economic Affairs Committee that in the U.K., "we’ve got a very tight labour market. We still think the rate of inflation is going to come down, but it’s taking a lot longer than we expected.”
Interest rates on government borrowing rose by more than 0.2%, rising to roughly 4.9% after the announcement of the wage statistics, surpassing the level seen in the wake of Truss's budget disaster in September. The cost of borrowing money from the government has increased partly because yields are the highest since the financial crisis of 2008. According to the Office for National Statistics, excluding COVID-19, growth in average regular pay, excluding bonuses, improved to 7.2% in the three months to April of this year, which was the highest level ever recorded in regular pay growth.
The Guardian also reported that overall compensation, including bonuses, climbed by 6.5% during the same months, possibly driven by big pay increases in the City of London for workers in the banking and business services sectors. However, pay growth still lags behind inflation, which is at 8.7%. So-called real pay is declining, which puts more strain on household finances, and with businesses likely to continue to raise wages to make up for a severe shortage of available workers, financial markets are wagering that the job market's resiliency could fuel chronically high levels of inflation. At the upcoming meeting of its monetary policy committee on June 22, experts predict that the bank will raise rates by at least a quarter point from the present level of 4.5%.
Possibly due to the encouraging jobs market, the unemployment rate unexpectedly fell to 3.8% in the first quarter, as companies continued to hire new recruits despite growing financial pressure from rising borrowing costs and subdued consumer demand, The Guardian reported.
