UK: Wage growth points to summer rate hike - ING

James Smith, Developed Markets Economist at ING, suggests that as markets become increasingly sceptical about the prospects of a UK rate hike this year, the latest wage data could prompt a bit of a rethink.

Key Quotes

“At 2.9%, earnings growth excluding bonuses is now running at the fastest rate since mid-2015 and will make the Bank of England more confident that its optimistic stance on wage growth is bearing fruit. Remember that survey evidence from Bank of England Agents has been pointing to the best year for pay settlements since the financial crisis.”

“Admittedly, we may be nearing a short-term peak. The first few months of last year were very bad for pay, but as this bleak period starts to exit the annual comparison, the numbers will start to encounter some more challenging base effects from next month.”

“That aside, there’s nothing here to make the Bank doubt its outlook for wage growth. Given that policymakers have cited rising pay pressure as a key justification for tighter monetary policy, we think markets are underestimating the risks of a summer rate rise.”

“For now, assuming the activity data recovers, bolstering the Bank’s assumption that much of the first quarter dip was snow-related, we still suspect that policymakers will be keen to raise rates in August.”