UK wages outstrip prices as Brexit squeeze runs its course

Frederick Owens
April 17, 2018

After the labor market figures it was steady at $1.4363, its highest since the Brexit vote.

The Pound pared earlier gains Tuesday as traders responded to a mixed labour market report, which showed wage packets growing slower than was expected in February, while the unemployment rate fell to a new 42 year low.

Average wages in Britain are rising faster than prices for the first time in about a year, official figures showed Tuesday, a development that will likely fuel expectations that the Bank of England will raise interest rates again next month.

According to the latest figures from the Office for National Statistics, average weekly earnings excluding bonuses rose by 2.8% in the three months to February, unchanged from the three months to January. With unemployment at its lowest level since the 1970s, employers have begun raising pay for staff more quickly, though by less than increases of about 4 percent a year before the financial crisis. The employment rate rose to a record high of 75.4%, as the number of people in jobs rose by 55,000 over the period. "Pay growth appears to be finally benefiting from the strength of jobs growth", says Ruth Gregory, a United Kingdom economist at Capital Economics. "As such, we continue to think that the MPC will hike rates three times this year, more than markets expect - with the next hike coming in May", Gregory predicts.

A worse-than-expected decline in German investor sentiment has today prevented the Euro to Pound (EUR/GBP) exchange rate from capitalising on the lacklustre Sterling response to the latest United Kingdom wage data.

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The pound sank in June 2016 after the Brexit vote, hitting $1.2068 in January of past year.

Dollar weakness after uncertainty about USA trade policy has also been a contributory factor, traders said. Inflation over the period, as measured by the consumer price index, was around 2.9 percent.

United Kingdom inflation data is predicted to show a small slowdown in month-on-month price growth from 0.4% to 0.3%, but an uptick in year-on-year core price growth from 2.4% to 2.5%, while overall price growth is expected to hold steady at 2.7%.

Forecaster are split on whether or not the Bank of England will raise rates from 0.5% to 0.75% in May, but the latest positive economic data seems to make that increase more likely. That's higher than the rate of inflation, which was 2.7% at the most recent reading.

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