ECONOMICS

There has been much for the Bank of England (BoE) to consider over the last week. Firstly, UK wage growth grew faster than expected and hit a record high. That would point to a 0.5% increase in interest rates in August.

Also supporting the likelihood of a 50-basis-point hike by the BoE at its next meeting was Employees’ regular average pay, which excludes bonuses. This grew at an annual rate of 7.3% in the three months to May. That’s the highest growth since records began.

The day before the data was released, BoE governor Andrew Bailey and Chancellor Jeremy Hunt jointly called for wage restraint. They noted that high pay settlements were hampering the fight against inflation. There were, however, some signs of weakening in the labour market, which should help cool wage growth if it continues. The unemployment rate for March to May 2023 increased by 0.2 percentage points to 4%. This was higher than analysts’ expectations of 3.8%.

That being said, just this morning, we had the latest inflation figures. Inflation fell by more than analysts expected, and it now stands at 7.9%. This is the lowest level it has been for over a year. And it may mean that the BoE choose to raise rates by just 0.25%. Or, they could be brave and not increase it at all. Only time will tell.

You will no doubt have seen in the news that UK short-term fixed mortgage rates are rising. They are now above the levels seen last autumn after the chaotic “mini-budget” issued by the Liz Truss government. These are levels not seen since the depths of the financial crisis in 2008. The average two-year fixed residential mortgage rate rose to 6.66%, according to Moneyfacts. This took the cost of two-year mortgages slightly above the peak of 6.65% set last autumn. This was when bond markets were roiled by then-Chancellor Kwasi Kwarteng’s package of unfunded tax cuts.

But a word of caution. These numbers for “average” mortgages are unhelpful. The full spectrum of every available mortgage rate are used, including those that are significantly higher for those with poor credit. They should therefore not be taken as the rate you will actually get. Of course, if you need mortgage advice, then our friends at eddge will be only too happy to help. I’d be glad to put you in touch with them.

There was some good news for the UK. The economy only marginally contracted in May as an extra bank holiday hit activity, but the decline was less steep than economists had expected. UK gross domestic product (GDP) fell 0.1% between April and May, following an expansion in the previous month. A consensus view expected a 0.3% fall.

A hot June encouraged consumers to spend a little more. Retailers reported an uptick in sales over the month as shoppers splashed out on barbecue food, swimwear, beach towels and garden furniture. The British Retail Consortium (BRC) said sales increased by 4.9% year-on-year last month, above the annual average growth rate. Much of the increase was driven by high inflation pushing up the overall value of spending, masking a drop in sales volumes. However, the figures suggest a pickup in sales from May when a trio of bank holidays failed to inspire consumers to spend.

The big news

The big piece of news for markets to cheer was the fact the Fed’s interest-rate medicine appears to be working. The latest consumer price index (CPI) inflation figures increased 3% annually in June. This was the smallest increase since March 2021 and down from a four-decade high of 9.1% in June 2022. However, the central bank is maintaining its hawkish stance and further rate rises are expected later this year.

US jobs growth slowed last month. This points to a sign that the weight of higher interest rates may be starting to slow the world's largest economy. Employers added 209,000 jobs in June, the smallest gain in more than two years, the Labor Department said. That was fewer than expected. However the unemployment rate still fell to 3.6%, down from 3.7% in May, with wage growth stronger than expected. The labour market is being watched closely, as the US central bank lifts borrowing costs to fight inflation.

Meanwhile, over in China, they are fretting about deflation. The country’s producer prices fell at their fastest pace in over seven years in June. While consumer prices teetered on the edge of a fall, coming in at 0.0%. China’s consumer prices will likely decline in July before recovering, Liu Guoqiang, deputy governor of the People’s Bank of China, said on Friday. It is likely that Beijing will launch further stimulus measures to kick-start demand.