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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK short-term borrowing costs surge above Truss-era highs; US inflation falls to 4% – as it happened

United Kingdom ING Inflation Interest Rates Jeremy Hunt Pandemic Rachel Reeves The Bank of England Unemployment CBI
Two-year UK government bond yields have surged past the peak of the Truss turmoil and have hit 4.73%.
Two-year UK government bond yields have surged past the peak of the Truss turmoil and have hit 4.73%. Photograph: Jeff Gilbert/Alamy

Afternoon summary

Time for a recap:

UK government borrowing costs have risen above the levels hit during Liz Truss’s disastrous premiership, after stronger than expected jobs and pay figures reinforced expectations that the Bank of England will raise interest rates next week.

Two-year gilt yields – the interest rate on short-term UK government borrowing – increased by more than 0.2 percentage points to 4.83% today, surpassing the level reached in the aftermath of Truss’s ill-fated mini budget. Yields are also the highest since the 2008 financial crisis.

It comes after figures from the Office for National Statistics showed growth in average regular pay, excluding bonuses, strengthened to 7.2% in the three months to April – the highest level on record, excluding the Covid pandemic.

But although wages rose, they still lagged behind inflation.

Today’s jobs report also showed a drop in vacancies, and a worrying rise in people long-term sick, to record levels.

The rise in borrowing costs will put more pressure on mortgage lenders to lift their rates, with Skipton building society planning to raise the cost of its no-deposit 100% mortgage for first-time buyers on Friday.

The gap between UK and German government borrowing costs also widened sharply today.

City traders believe the Bank of England is certain to raise interest rates again next week – the money markets indicate a quarter-point hike, to 4.75%, is a 70% chance, with a 30% possibility of a larger, half-point rise to 5%.

The newest Bank of England interest rate setter, Megan Greene, has warned MPs that it will be tough to return inflation to the UK’s 2% target, from the 8.7% rate recorded in April.

She told the Treasury Committee:

“I think that there is some underlying persistence and so getting from 10% to 5% ... is probably easier than getting from 5% to 2%.”

Over in the US, inflation slowed to 4% in May, boosting hopes that the US Federal Reserve might leave interest rates on hold tomorrow.

Elsewhere today…

It has emerged that less than a third of the Confederation of British Industry’s remaining members backed the business lobby group at last week’s crunch vote on its survival.

The confidence vote followed a series of sexual misconduct allegations that prompted several companies including John Lewis and NatWest to terminate their membership of the CBI.

The revelation of the low turnout at such a critical vote emerged as leaders from the group gave evidence to MPs on the business and trade select committee on Tuesday, as parliament weighs its links with the body.

The CBI’s director-general, Rain Newson-Smith, also declined to tell MPs how many members the group had lost since the scandal broke, but insisted she was very confident it could recover from the crisis.

Odey Asset Management’s board has decided to close the Odey Swan Fund, in the wake of sexual misconduct allegations against its founder Crispin Odey, with JP Morgan cutting ties with the hedge fund.

Shareholders in British Gas owner Centrica have approved its chief executive’s £4.5m pay packet, which had been labelled a “slap in the face” to struggling bill payers, at the company’s annual meeting in Leeds.

The company said that 93% of votes were cast in favour of approving Chris O’Shea’s remuneration, despite controversy over the prepayment meter scandal and ballooning profits made by energy firms during the cost of living crisis.

An ad campaign by Anglian Water extolling how it cleans water by creating wildlife-friendly wetlands has been banned for not telling consumers about its history of releasing sewage into the environment.

Updated

Wall Street opens higher

The Wall Street Bull in Manhattan, New York.
The Wall Street Bull in Manhattan, New York. Photograph: Carlo Allegri/Reuters

The US stock market has opened higher, on relief that US inflation fell in May.

The Dow Jones industrial average, of 30 large US companies, has gained 69.2 points or 0.2% to34,135.59 points in early trading.

The broader S&P 500 has gained 0.4%, with the tech-focused Nasdaq gaining 0.7%, taking both indices to fresh one-year highs today.

Last month’s slowdown in consumer prices is cementing expectations that the Federal Reserve could skip raising interest rates, when its two-day meeting finishes tomorrow.

In London, the FTSE 100 index has gained 0.25%, with mining companies among the risers. But shares in housebuilders have dropped, as traders anticipate further UK interest rate rises.

Updated

Full story: US prices rose 4% over the last year as Fed considers pause in rate hikes

The prices of goods and services in the US rose 4% over the last year, showing a cooling of prices as the Federal Reserve considers pausing interest rate hikes this week, my colleague Lauren Aratani writes.

Inflation year-over-year in May was down 0.9% compared with April and is the lowest rate since April 2021, when prices started to climb, according to the latest consumer price index (CPI) data, which measures the prices of a basket of goods and services.

The slowing of price increases can largely be attributed to energy prices, which were soaring this time last year because of Russia’s invasion of Ukraine.

Energy prices went down 11.7% over the last year.

The US dollar weakened, after America’s inflation rate dropped by more than expected in May (economists had forecast CPI would drop to 4.1%).

This has pushed the pound up over $1.26 for the first time since 11th May.

Greg Daco of Oxford Economics has helpfully analysed today’s US inflation report:

Today’s drop in US inflation has taken the pressure off the Federal Reserve to consider another increase in interest rates tomorrow, says Seema Shah, Chief Global Strategist at Principal Asset Management.

But July’s meeting could bring another hike, Shah suggests:

“It would likely have taken a meaningful upside inflation surprise to convince the Fed to hike in June. With inflation coming broadly in line with expectations, the pressure is off. Tomorrow is likely to be the first FOMC meeting since March 2022 without a policy rate hike. Yet, with annual core inflation actually rising further in May and coming hot off the heels from the very strong jobs report, the July FOMC meeting is very much live.

Shah points out that core inflation (excluding food and energy) rose 0.4% in May alone, as it did in April and March.

“In fact, monthly core inflation is showing no signs of deceleration just yet - a fact that is entirely inconsistent with the Fed’s attempt at achieving price stability.”

Updated

The big question gripping financial markets is whether the slowdown in US inflation, to a two-year low, will give the US Federal Reserve confidence to leave interest rates on hold tomorrow.

Hugh Grieves, fund manager at Premier Miton Investors, says the Fed faces tough choices:

“The Fed is making painfully slow progress in achieving its 2% target as core inflation ‘only’ falls to 5.3% in May compared to 6.0% a year ago.

“Soon the Federal Reserve is going to start having to make some tough choices between its anachronistic goal and accepting that the global economy has permanently shifted to a new and higher inflation plane.”

Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, argues that further Fed tightening may not be needed:

“The further sharp drop in US headline inflation to 4.0% with core inflation drifting further down to 5.3% build further trust that inflation is under control and that further Fed tightening may not be necessary.

With continuing strong employment numbers and this constructive backdrop, we believe investors do not need to fear an imminent deep recession, and rather look forward to a normalising economic environment with a shallow and short recession, should there be one.”

Today’s fall in the rate of US inflation is likely to be welcomed by investors, but it remains “stubbornly” above the Fed’s 2% target, says Richard Flynn, Managing Director of Charles Schwab UK.

Flynn explains:

The good news is that the “stickiness” in inflation is now confined to a smaller number of categories compared to earlier in the year. In recent months three sectors largely accounted for above-average inflation – housing, financial services and used cars. As the sectors of price inflation narrow, the overall trend will likely improve.

“Our view continues to be that the green light for the Fed to not just pause, but to pivot to rate cuts would require much weaker economic growth or more significant stress in the banking system. The Fed is already suffering a credibility problem—a pivot to rate cuts with inflation still well above their target, and in the absence of significant deterioration in employment would really damage what remains of their inflation-fighting cred.”

Updated

Inflationary pressures in America eased last month, today’s inflation report shows.

During May alone, consumer prices rose by 0.1% – down from the 0.4% rise recorded in April alone.

The Bureau of Labor Statistics explains how housing costs (known as ‘shelter’) was the biggest factor pushing up the cost of living in the US:

The index for shelter was the largest contributor to the monthly all items increase, followed by an increase in the index for used cars and trucks.

The food index increased 0.2 percent in May after being unchanged in the previous 2 months. The index for food at home rose 0.1 percent over the month while the index for food away from home rose 0.5 percent. The energy index, in contrast, declined 3.6 percent in May as the major energy component indexes fell.

US inflation falls to 4%, a two-year low

Newsflash: the cost of living squeeze in the US has eased.

The US Consumer Prices Index fell to an annual rate of 4% in May, which is the lowest reading since March 2021, down from 4.9% in April.

That’s much lower than in the UK, where inflation was 8.7% in April, partly because America did not suffer such a sharp surge in energy prices after the Ukraine war, and has benefited from a drop since.

US core inflation, which strips out food and energy, fell to an annual rate of 5.3%, down from 5.5%.

US energy prices were 11.7% lower in May than a year ago, the inflation report shows, while food prices index increased 6.7% over the last year.

Updated

Gap between UK and German borrowing costs swells

The gap in borrowing costs between London and Berlin has swelled today.

The selloff in UK two-year government bonds, which has pushed yields above their mini-budget panic levels, means it costs significantly more for the UK to borrow than for Germany.

While UK two-year gilts are now yielding 4.8%, German two-year bunds are trading at a yield of 2.96%.

The gap is even wider for borrowing over the next decade – UK 10-year gilts have a yield of 4.38% today, while Germany’s 10-year bunds trade at 2.36%.

Reuters’ Andy Bruce has the details:

Updated

Skipton building society is raising the cost of its no-deposit 100% mortgage for first-time buyers but the deal remains available at current prices until Friday, Forbes are reporting.

The deal was only announced last month (on the day when Halifax reported house prices were falling), but now needs to be repriced due to the jump in UK bond yields as interest rate expectations climb.

Forbes explains:

The mutual lender’s Track Record product, a 100% mortgage deal which launched last month, is a five-year fixed rate deal at 5.49%. This rate will be available until 10pm on Thursday (15 June) so borrowers need to act fast if they want to secure this deal.

Skipton says the rate will rise to 5.89% on Friday (16 June).

The rate increase also means the maximum loan a first-time buyer can borrow through the deal will reduce.

This is because the Track Record loan is structured so that the monthly mortgage payments cannot be more than the average of the last six months’ rental costs the applicant has paid.

Nick Mendes at broker John Charcol said:

At the time of launch the track record mortgage was priced on a 5 year fixed of 5.49%, which was higher than other higher LTV products at the time.

The rate had enough margin to take into account higher LTV risks and small increases in fixed rates.

Swaps have increased since the product was launched, average 5 year fixed rates are increasing, and the product is no longer viable to remain unchanged.

Updated

Here’s the BBC’s Faisal Islam on today’s bond market ructions:

Faisal also points out that NatWest are raising their Buy to Let stress rates

And here’s some international context:

The pound has rallied today, on expectations of further UK interest rate increases.

Sterling has gained more than half a cent against the US dollar, to $1.257, after this morning’s jobs and wages data.

Jon Camenzuli, senior corporate dealer, at Moneycorp, explains why:

“Today’s leap in basic wage growth to 7.2% is the first sure sign of the wage-price spiral Andrew Bailey warned us about.

“ING came out yesterday saying we likely won’t see any rate cuts until this time next year and they could well be right. This week is a huge one for data and all of it seems to be pointing to the same thing - further action is needed, regardless of what’s happening in Europe.

“We could see the pound continue its incredible rally if the UK avoids a recession and the Bank of England continues raising rates after the European Central Bank stops. This won’t be welcome news to UK businesses that rely on euro income, but there are no easy decisions in the current economic environment.”

Financial markets now think UK borrowing costs could leap to a high of 5.75%, up more than a percentage point from their current level of 4.5%, as the Bank of England attempts to fight inflation.

That’s based on the rates of sterling overnight index swaps – which indicate how the markets expect interest rates to move.

Today’s wage data indicates there is no sign, yet, that the UK labour market is cooling, warns NIESR, the economic forecaster.

Paula Bejarano Carbo, associate economist at NIESR, says:

Today’s ONS estimates suggest that average weekly earnings, excluding bonuses, grew by 7.2 per cent across the whole economy in the three months to April, representing the largest growth rate in regular pay recorded outside of the pandemic period.

The private and public sectors saw regular pay growth of 7.6 per cent and 5.6 per cent, respectively. The employment rate increased by 0.2 percentage points to 76 per cent in this three-month period, while total hours worked reached a record high, surpassing pre-pandemic levels. It seems that the cooling labour market that high-frequency indicators have been pointing to is yet to materialise.”

Updated

Odey shuts Swan Fund, gates redemptions on other fund

In the City, the crisis at Odey Asset Management following the publication of sexual assault allegations against its founder, Crispin Odey, is deepening today.

Odey Asset Management has just announced that it is shutting its Swan fund and gating two other funds, following a surge in redemption requests from investors keen to take their money out.

The firm has suspended all dealings in the Odey Swan fund and will redeem investors by September 4, according to a letter dated Monday.

The letter says the the board of Odey Asset Management also decided to suspend the issue, conversion and redemption of Swan Fund shares in order to “efficiently manage the redemptions and in the best interests of Shareholders”.

A subsidiary of Odey Asset Management has stopped investors from withdrawing money from the Brook Developed Markets fund in the wake of sexual misconduct allegations against Crispin Odey.

Redemptions have been gated following a higher volume of requests from investors to withdraw, which exceeded 10% of the fund’s net asset value.

This comes after a number of female employees made allegations of sexual misconduct against multimillionaire Conservative donor Crispin Odey.

On Saturday, the executive committee of Odey Asset Management said that Odey would “no longer have any economic or personal involvement in the partnership”. Yesterday it emerged that Crispin Odey’s name will be removed from hedge fund he founded.

Odey told the Guardian last week that the allegations had not been proven in court and he had done nothing illegal.

Update: JPMorgan is terminating its relationship with Odey Asset Management, the Financial Times is reporting.

Goldman Sachs International CEO Richard Gnodde has told Bloomberg the bank is “in the process of moving away” from its prime-brokerage relationship with Odey Asset Management.

Updated

Here’s Victoria Scholar, head of investment at Interactive Investor, on the jump in the 2-year UK gilt yield over its peak after last September’s mini-budget:

It comes after this morning’s UK labour market statistics which saw a rise in the number of people in employment to an all-time high and the fastest pace of growth since records began for basic pay (excluding the anomalous pandemic period).

These both underscore the tightness in the labour market, which could inhibit the decline of inflation, prompting the Bank of England to carry out further interest rate increases to cool price pressures.

Financial markets are pricing in further moves to tighten monetary policy from the current bank rate of 4.5% to 5.5% by year-end, which would add to pressure on consumers and businesses through higher borrowing rates.

Resolution Foundation have pulled together a handy thread on this morning’s UK labour market report -and are hopeful that the squeeze on real wages could be ending:

Bank's new policymaker: lowering inflation to 2% will be hard

The newest Bank of England interest rate setter has warned that it will be tough to return inflation to the UK’s 2% target.

Megan Greene was speaking to the Treasury Committee this morning, as short-term bond yields continue to climb.

Greene, an economist who is joining the Bank’s MPC from consultancy group Kroll in July, told MPs that the BoE should act against signs of persistence in inflation.

She told the committee that halving inflation from its peak last winter will be easier than bringing it down to target, saying:

“I think that there is some underlying persistence and so getting from 10% to 5% ... is probably easier than getting from 5% to 2%.”

Significantly, Greene then warns about the risks of relaxing monetary policy too soon.

She says:

“If you engage in stop-start monetary policy, you may end up having to tighten even more and generating an even worse recession on the other side.

“And also that inflation expectations can’t be allowed to become de-anchored or you end up in that situation.”

UK short-term borrowing costs have continued to soar above their mini-budget peak last autumn.

The yield on two-year gilts now trading at 4.83%, the highest since the 2008 financial crisis, up from 4.62% last night.

The yield on UK two-year bond yields
The yield on UK two-year bond yields Photograph: Refinitiv

Updated

Newton-Smith doesn't rule out CBI name change

Q: Is the CBI planning to change its name, Ian Lavery MP asks…

Rain Newton-Smith says the CBI’s name isn’t the most important issue, but doesn’t deny that a rebrand is an option.

She says the CBI’s listening exercise with business leaders found they believe the UK need a strong collective voice on business, and want the CBI to focus on issues such as sustainable growth, and improving employment and skills.

The CBI’s director-general tells MPs:

At some stage, if we change our name, would we move away from being the Confederation of British Industry? Again, it’s really one for our members.

In April, the Financial Times reported that “the crisis-stricken CBI will be renamed as part of efforts to demonstrate that it has reformed its toxic workplace culture”.

Updated

Ian Lavery MP asks whether the CBI is now unnecessary, as other business groups have “stepped up to the plate” since it was forced to pause its work.

[for example, the British Chambers of Commerce has launched a new Business Council to bring business leaders together]

Rain Newton-Smith says the CBI has been, and can be a really important voice on key issues – such as high inflation and the cost of living crisis, and weak growth.

She cites this Spring’s budget, which took on the CBI’s work on childcare reform, and work helping firms to decarbonise.

CBI won't say how many members it has lost

The Business and Trade committee then ask Rain Newton-Smith how many members the CBI actually has left, following the crisis that engulfed the lobby group.

Director-general Rain Newton-Smith says the CBI has 1,200 direct members, which represents 2.5m private sector employees, plus 120 trade associations (which include 160,000 business organisations).

In contrast, Germany’s BDI has 39 sector association members, representing 100,000 businesses, she adds.

Update: Last week’s confidence vote saw 371 votes cast in total,with 93% backing the CBI, so this suggests most members didn’t actually vote.

Q: The Labour party, HMRC…are advocating no direct senior-level connection with the CBI. How many members have you lost?

Newton-Smith says the CBI has lost ‘some members’, but won’t give a total.

[Back in April, more than 20 businesses cut ties with the CBI after the Guardian reported a second woman had alleged that she was raped by two male colleagues when she worked at the group.

That included Accenture, Arup, Aviva, BMW, Fidelity International, Jaguar Land Rover, Kingfisher, Phoenix Group, Sage and Virgin Media O2, with other companies pausing work with the CBI.]

Newton-Smith says the 1,200 members it represents now is a “really strong mandate” – and one that policymakers on both sides of the House of Commons should be listening too.

Q: But it’s very hard to tell if you still have the confidence of the industry as a whole, without knowing how many members you have lost… How will you regain trust with government departments?

Newton-Smith insists that the “vast majority” of members have stayed with the CBI.

The CBI has been “very open about its programme of change”, showing how seriously it takes its reforms, she adds.

It is also showing it has strong businesses behind it, she insists, and bats the question back to MPs, saying:

I would ask, what else do we need to do? I think we have a mandate that any politician or policymaker would respect.

We are putting ourselves in front of scrutiny, in front of parliament today.

We have the trust of our membership.

Updated

CBI chief: very confident that we can recover from the crisis

The new head of the CBI has declared she is very confident that it can recover from the crisis that has gripped the business lobby group this year.

Rain Newton-Smith, the CBI’s new director-general, is appearing before parliament’s business and trade committee now.

Committee chair Darren Jones MP starts by asking about the reputational damage caused by recent allegations (of multiple examples of sexual misconduct by senior figures at the CBI, reported by the Guardian).

Q: Are you and your members confident that you can recover from this period of reputational damage?

Newton-Smith, who returned to the CBI in April, says:

Yes, we are very confident that we can recover from the crisis that our organisation has gone through.

It has been a difficult time for us as an organisation, but we really responded to it and set out a programme of change.

Newton-Smith tells MPs that 93% of members voted in support of that programme last week, backing its plans around people and culture, and how its members want it to be a very strong voice for business.

Q: The victims involved in these cases want to see that you’ve understood the root causes that led to those situations arising. What have you found from the work have you done?

Newton-Smith says the CBI has looked into its organisation, and used independent experts such as law firm Fox Williams to investigate the allegations reported in the Guardian.

Consultancy firm Principia Advisory have surveyed over 90% staff, and ran 110 interviews to understand their experiences with the CBI

Q: So what were the root causes of the problems that occured?

Newton-Smith says the CBI has no information on the two alleged rapes, so it hasn’t been able to investigate those allegations.

But it has looked into the issue of whether women always felt supported when they raised concerns, and whether the CBI had the right processes and support processes.

The CBI wants to be very best organisation at supporting individuals as and when they they raise grievances, she says.

Q: So the governance at the CBI wasn’t right before because there wasn’t a channel to raise concerns?

Newton-Smith says governance was weaker than it should have been.

Although there was a whistle-blowing line, she says some staff didn’t feel confident in using it, or able to use it.

TUC: “Family budgets can’t take any more”

The TUC have warned that family budgets can’t take any more pressure, after wages continued to lag inflation in the last quarter.

That’s because basic pay growth, at 7.2%, was well behind April’s inflation reading of 8.7%, meaning real wages are still falling.

TUC General Secretary Paul Nowak says “working people have had enough”.

Nowak is urging the government to resolve the current public sector pay disputes, and lift the minumum wage to help low earners through the cost of living squeeze.

“It’s no wonder workers are reluctantly taking strike action to defend their living standards. They’ve been backed into a corner and pushed to breaking point.

“Ministers need to get round the table and resolve all of the current pay disputes.

“People need money in their pockets now.

“The government must give public sector workers a real pay rise, boost the minimum wage to £15 per hour, and end their draconian attack on the right to strike in the Strikes Bill.”

Today’s wage growth data (see opening post) highlight the risk of a wage-price spiral to inflation, says Josie Anderson, managing economist at the CEBR.

With regular pay growing at 7.2% per year, the highest on record (outside of Covid-19) times, the Bank of England is more likely to raise interest rates.

Anderson explains:

With inflation and wage growth both at very high levels, and unemployment remaining at just 3.8% in the three months to April, employees have been able to bargain for higher wages to cover their rising living costs.

As the volatile components of inflation, such as energy, bring down the headline rate of CPI, stickier components, such as consumer services, may cause inflation to persist. This will particularly be the case if wage growth stays high, as this will encourage businesses to raise prices in order to maintain their margins.

This morning’s wage growth data have, therefore, increased the likelihood of an interest rate rise from the Bank of England later this month. Cebr expects a 25 basis point hike, taking the base rate to 4.75%.”

Updated

Mortgage broker: Monday was horrendous

This morning’s surge in UK short-term borrowing costs comes amid turmoil in the mortgage market.

Yesterday, NatWest told mortgage brokers it was raising prices on some new and existing mortgages from today, including a 1.57% percentage point increase on some buy-to-led loans.

Santander paused new applications for certain products last night, ahead of launching a new range tomorrow.

That followed HSBC temporarily removing its “new business” residential and buy-to-let products last week, and Nationwide lifting its rates.

Lenders are struggling to keep their prices in line with interest rate expectations, since UK inflation fell much less than expected in April, to 8.7%. Once one pulls its business, potential customers flood to the next.

Today’s increase in two-year UK government bond yields will put more pressure on lenders to reprice mortgages higher.

Steven Morris, advising director at Advantage Financial Solutions LTD, says yesterday was “quite simply horrendous”.

Morris explains:

We had rate withdrawals and rate increases across the board. Some increases with high street lenders were as high as 1.57%. Some lenders paused lending altogether for a period. Withdrawal deadlines of just a few hours were given. My advice to customers right now is don’t even bother getting mortgage advice unless you are prepared to apply within a couple of hours.

Send your broker documents ASAP and up-front if possible or you don’t even stand a chance of getting a deal before it’s withdrawn.

He also urges borrowers to “be kind to your broker”:

They have a zillion other clients in the same position as you and with lenders giving just a few hours’ notice of products being withdrawn, are left having to choose which client to ‘save’.

Being a mortgage broker right now is like trying to stop the tide from coming in armed with a mop. Pointless.

Here’s our news story on this morning’s wage growth data, which is piling pressure on the Bank of England to raise interest rates even higher.

UK short-term borrowing costs highest since financial crisis

UK two-year borrowing costs are now at their highest level since the financial crisis, points out Bloomberg’s Kristine Aquino, following their jump today (see here).

She explains:

And there we have it -- two-year gilt yields have surged past the peak of the Truss turmoil and have hit 4.73%, the highest level since 2008.

While that’s quite the milestone, it’s well below the 5.75% level that traders currently expect for BOE borrowing costs. In that case, there may be more pain to come for gilts as markets come to grips with the prospect of even higher rates.

Here’s M&G’s Bond Vigilantes team on the jump in UK borrowing costs:

Updated

Newsflash: UK 2-year bond yields above Truss panic levels

Expectations that UK interest rates will keep rising are driving up the British government’s short-term borrowing costs ABOVE levels seen in Liz Truss’s brief premiership.

That’s bad news for people who looking to take out a mortgage, or remortage, soon.

The yield, or interest rate, on UK two-year government bonds has hit 4.73% this morning, up from 4.62% last night, after this morning’s jobs report showed regular pay growing at the fastest rate on record.

That is slightly higher than the peak seen in the turmoil after last autumn’s mini-budget, when chancellor Kwasi Kwarteng’s plan for unfunded tax cuts spooked the markets.

A chart A chart showing the yield, or interest rate, on UK two-year bondstwo-year bond yields
A chart showing the yield, or interest rate, on UK two-year bonds Photograph: Refinitiv

These two-year gilts are used to price fixed-term mortgages, and the recent increase in yields has already been forcing lenders to reprice deals, or pull them off the markets.

There could be more pain ahead too, as the money markets expect Bank of England base rate to hit 5.5% by the end of this year, up from 4.5% today.

Longer-dated government bond yields have also risen today, but are below their panic levels last autumn.

The surge in bond yields last autumn was partly driven by forced selling by pension funds who had followed Liability Driven Investment strategies, and by a lack of confidence in the Truss-Kwarteng plan.

Neil Wilson of Markets.com says the current situation is different, compared to last September when “the mini-Budget was doing its wrecking ball job”.

This time is different – LDI has unleveraged, and it’s not about the fiscal or political risk premium. It’s all about strong wage numbers driving expectations for the Bank of England to need to press hike button again and again.

We are now in wage-price spiral territory – private sector wage growth rose to 7.6% in the three months to April, whilst overall regular pay rose 7.2%. This only makes it harder for the BoE to cool inflation – a tougher stance is required but we know the dangers for the economy and notably the mortgage market if that happens.

Updated

On today’s jobs data, Minister for Employment Guy Opperman MP says:

“Our drive to get more people into work and grow the economy has seen inactivity fall for the fifth month in a row. Vacancies continue to drop, employment is up and the numbers on company payrolls are also up.

“We’re investing £3.5 billion to remove barriers to work - with extra support for people with health conditions, an expansion of free childcare and arming jobseekers with the skills they need through tailored training and extra work coach time.”

Odds of a half-point interest rate rise next week are up....

The money markets indicate that the Bank of England is certain to lift interest rates next Thursday…. and a bumper increase in borrowing costs is looking more likely.

Currently, a quarter-point increase in Bank rate to 4.75%, from 4.5%, is seen as a 70% chance.

And a half-point increase, taking Bank rate to 5%, is now seen as a 30% possibility, up from around 25% yesterday afternoon.

The markets now predict Bank rate will be above 5.5% at the end of this year, a whole percentage point higher than today.

Emma Mogford, fund manager at Premier Miton Monthly Income Fund, says today’s jobs market report suggests interest rates must stay higher for longer.

The labour market remains surprisingly tight with unemployment falling and wage inflation increasing.

While broadly good news for the UK economy, this is very challenging for the Bank of England. It may mean interest rates have to stay higher for longer to bring inflation back to normal levels.”

UK labour market report: what the experts say

Reaction to this morning’s UK jobs report is flooding in.

Matthew Percival, the CBI’s Director for People and Skills policy, warns that the increase in long-term sickness (see earlier post) is concerning.

“While the number of people in work is rising and unfilled vacancies are slowly falling, the difficulties companies face when hiring is still a hard brake on growth.

Signs that stubbornly high inactivity is starting to fall are encouraging, but a new record high number of people unable to work because of long-term sickness is a real cause for concern.

“Business and government have identified getting people back into work as a top priority. A laser-like focus on delivering the promised expansions to childcare and occupational health services, and businesses increasing flexible working can quicken the pace of easing shortages.”

ING says another increase in UK interest rates next week now looks very likely, followed by another in the summer, given the strong wage growth (although still not matching inflation…)

ING say:

Faster-than-expected wage growth points to a rate hike in June and potentially August, and is a reminder that pay pressures are likely to ease only gradually.

That doesn’t necessarily suggest the Bank of England needs to raise rates as aggressively as markets expect, but it does imply that rate cuts are some way off.

Jake Finney, economist at PwC UK, says the labour market “remains tight” but there are signs that is is normalising, adding:

“The economic inactivity rate declined on the previous quarter to 21%, which was driven by falls to inactivity rates across all age groups. However, the number of workers inactive due to long-term sickness remains persistently elevated - reaching another record high this quarter.

“Declining inactivity saw both the employment and the unemployment rates increase on the previous quarter. As a result, the total number of employed workers has returned to pre-pandemic levels for the first time. This indicates that the labour market is gradually normalising.

Kitty Ussher, chief economist at the Institute of Directors, says firms are still struggling to hire workers:

“Today’s data shows that while the labour market has stabilised a little since the acute shortages of late 2021, it remains very tight by historical standards.

“It also confirms a structural shift: more people with home and caring responsibilities are working than before the pandemic, presumably because they can do so remotely, but those excluded from the labour market due to sickness is depressingly far higher.

The slight rise in unemployment in the latest data is due to more people starting to look for work, not increased layoffs.

Reeves: falling real wages are hurting families

And here’s Labour’s shadow chancellor, Rachel Reeves, responding to today’s labour market statistics, said:

“Our country has enormous potential. We should be leading in the industries of the future and creating good jobs across Britain, but the Tories continue to hold us back.

“Family finances are being squeezed to breaking point by a further fall in real wages, and record numbers of people are out of work due to long-term sickness.

“13 years of the Tories and all we have is a gaping hole where their plan for growth should be and a Tory mortgage penalty damaging family finances for years to come.

“Labour will get people back into work, and with our mission to secure the highest sustained growth in the G7, create good jobs and productivity growth across every part of our country.”

Hunt: rising prices are continuing to eat into people’s pay checks

Chancellor the Exchequer Jeremy Hunt has acknowledged that inflation is taking a bite out of earnings, saying:

“The number of people in work has reached a record high, and the IMF and OECD recently credited our major reforms at the Budget which will help even more back into work while growing the economy.

“But rising prices are continuing to eat into people’s pay checks – so we must stick to our plan to halve inflation this year to boost living standards.”

Hunt’s plan to tackle inflation has includes refusing larger pay increases for the public sector, to help doctors, nurses and teachers through the cost of living squeeze:

ONS: Wages still lag inflation

ONS director of economic statistics Darren Morgan says:

“With another rise in employment, the number of people in work overall has gone past its pre-pandemic level for the first time, setting a new record high, as have total hours worked. The biggest driver in recent jobs growth, meanwhile, is health and social care, followed by hospitality.

“While there has been another drop in the number of people neither working nor looking for work, which is now falling right across the age range, those outside the jobs market due to long-term sickness continues to rise, to a new record.

“In cash terms, basic pay is now growing at its fastest since current records began, apart from the period when the figures were distorted by the pandemic. However, even so, wage rises continue to lag behind inflation.”

People not working due to long-term sickness hits fresh record

The number of people out of the labour market because of long-term sickness increased to a record high, this morning’s UK unemployment report shows.

The rise in chronic illness in the UK in recent years has forced more people out of the labour market. As well as Covid-19, the rise in NHS waiting lists to record levels means 7.4 million people in England are waiting to start treatment.

Ben Harrison, Director of the Work Foundation at Lancaster University, says:

“With a record 2.55 million long-term sick, the UK is the worst performer in the G7 for workforce participation since the start of the pandemic. Yet nearly one in four people who are long-term sick want to work.

Mel Stride MP’s review of workforce participation therefore must recognise the importance of improving the quality of jobs on offer.

Emelia Quist, head of policy research at the Federation of Small Businesses, says current support to bring people with long-term sickness back into jobs isn’t working:

Despite this rise, the overall economic inactivity rate decreased by 0.4 percentage points on the quarter, to 21.0% in February to April.

Here’s Sky News’s Paul Kelso:

Updated

The number of vacancies at UK firms has dropped.

There were 1,051,000 vacancies in March to May 2023, down from 79,000 in December 2022 to February 2023.

That’s the 11th drop in a row, with 250,000 fewer vacancies than a year ago, today’s labour market report shows.

The ONA also estimates that firms kept hiring staff last month.

It estimates that UK payrolls rose by 23,000 in May, to 30.0 million, over a million more than before the pandemic.

UK employment total at record high

Today’s labour market report shows the number of people in employment increased to a record high in the latest quarter.

There were increases in both the number of employees and self-employed workers, the Office for National Statistics reports, pushing up the employment total by 250,000 in February-April to 33,089m.

That has lifted the UK’s employment rate to 76%, up from 75.8% in November to January.

The unemployment rate was 3.8%, up from 3.7% in the previous quarter but down on the 3.9% reported last month.

The increase in unemployment in the last quarter was driven by people unemployed for up to 12 months, the ONS adds.

Introduction: UK basic wages grow 7.2%; CBI chief to face MPs

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

UK wage growth has strengthened, giving the Bank of England another headache as it tries to cool inflation without crashing the economy.

But while earning are growing, they are still not keeping pace with inflation.

Regular pay (excluding bonuses) rose by 7.2% per year in the February-April quarter, new figures from the Office for National Statistics show, up from 6.6% in November-January.

That is the fastest growth rate for basic pay on record, if you exclude the Covid-19 pandemic which distorted wage data.

Wages were boosted by the 9.7% rise in the minimum wage in April.

Total pay, including bonuses, grew by 6.5% per year in the three months to April.

The Bank is due to set interest rates next week, on Thursday 22 June, and looks certain to hike borrowing costs for the 13th time in a row.

Yael Selfin, chief economist at KPMG UK, says the UK’s “Continued strength in pay growth” will warrant higher interest rates”.

Selfin adds:

“The pickup in regular pay growth is the latest sign that inflation is driving up pay demands, which in turn is making inflation stickier. With negative productivity growth, these figures are well above the levels consistent with the 2% target.

“As higher interest rates feed through to the economy, we still expect the labour market to loosen. But even in that scenario, pay growth may continue to be inflationary as the moderation in prices will drive up real wages and strengthen workers’ purchasing power.

“If there was still any doubt about the direction of monetary policy, these data should solidify another interest rate increase from the Bank of England next week, and probably more in the coming months.”

However, in real terms earnings still fell, as UK inflation was clocked at 8.7% in April

A graph showing UK nominal and real wages

Average regular pay growth for the private sector was 7.6%, again the largest growth rate seen outside of the pandemic period.

Public sector pay growth was weaker, growing by 5.6%, the fastest growth rate since August to October 2003 (when it rose by 5.7%).

The finance and business services sector saw the largest regular growth rate at 9.2%, followed by the manufacturing sector at 7.0%.

That’s the fastest rise in manufacturing pay since comparable records began in 2001.

More details to follow….

Also coming up today

Having won a confidence vote last week, the CBI’s new director-general will face MPs today in a one-off evidence session.

Rain Newton-Smith will be questioned by the Business and Trade Committee this morning, at a hearing which will focus on “the group’s future role, and actions to clean it up”.

The hearing will also examine whether the CBI can still claim to speak for big businesses, as my colleague Anna Isaac explains:

Rain Newton-Smith, a former CBI chief economist who has rejoined as director general while it grapples with the fallout from a sexual misconduct scandal, is to take questions on the organisation’s failings and its future ambitions during an appearance before the business and trade committee.

The Guardian has revealed that more than a dozen women have claimed to have been victims of various forms of sexual misconduct by senior figures at the CBI. This included an account from a woman who alleged she was raped at a staff party on a boat on the Thames and another who claimed she was raped by colleagues when she worked at a CBI office overseas.

Down the corridor at Westminster, the Treasury committee will hold a pre-appointment hearing with economist Megan Greene, ahead of her appointment to the Bank of England’s monetary policy committee.

Greene is joining the Bank at a time when the mortgage market is in turmoil, so will probably be asked whether she supports further interest rate hikes to fight inflation.

Expectations of higher rates have forced several lenders to pull deals, or reprice them higher.

Financial investors are eager to see the latest US inflation data today, which will help determine whether the US central bank raises rates tomorrow, or holds borrowing costs.

The annual US CPI inflation rate is expected to have fallen to 4.1% from 4.9%, with a smaller dip in core inflation.

Michael Hewson, analyst at CMC Markets explains:

It is in core prices that we might see some nervousness for markets ahead of tomorrow’s CPI numbers. If we don’t see a slowdown in core prices, then that might introduce some nervousness that might prompt the Fed to hike again tomorrow instead of the pause that is currently being priced.

The agenda

  • 7am BST: UK labour market report

  • 10am BST: ZEW Institute survey of German and eurozone economic sentiment

  • 10am: House of Commons Business and Trade Committee questions CBI chief Rain Newton-Smith

  • 10.15am: Treasury Committee holds pre-appointment hearing with new Bank of England MPC appointee Megan Greene

  • 1.30pm BST: US CBI inflation report for May

Updated

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