UK short-term borrowing prices rise above ‘mini-budget’ disaster ranges on sturdy labor market information

The UK Treasury building.

Matthew Lloyd | Bloomberg | Getty Images

LONDON — The cost of borrowing in the UK, as measured by the yield on short-term government bonds, rose above levels last seen after the UK’s market-disrupting ‘mini-budget’ after jobs data showed rising wage growth on Tuesday.

The yield on two-year-old gilts rose 23 basis points to 4.876% as of 4:40 p.m. London time, according to Refinitiv data, beating the 4.75% set on September 28 and marking the highest level since July 2008.

UK annual average wage growth excluding bonuses accelerated to 7.2% in the February-April quarter from 6.7%, the fastest rate on record. Economists polled by Reuters had expected wage growth of 6.9% for the reported first period since the national hourly minimum wage was raised from £9.50 to £10.42 ($13.1).

Inflation-adjusted real wages showed wage growth falling 2% including bonuses and 1.3% excluding bonuses.

The UK Office for National Statistics report showed that the employment rate rose by 0.2 percentage point over the same period as the number of people in work hit a record high. Unemployment rose by 0.1 percentage point as the number of ‘economically inactive’, who are neither employed nor job-seekers, fell.

Economists were quick to forecast a sharp rise in UK government bond yields on the back of the data, raising expectations for Bank of England rate hikes.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the figures “would give the impression that the UK has a unique problem with ingrained high inflation”.

The central bank is attempting to rein in inflation, which is among the strongest of any developed economy and was 8.7% in April.

“While we expect inflation numbers to be weaker next week and generally expect inflation numbers ahead of the August meeting to be more in line with BoE May expectations, April’s surge and today’s rise in the labor force survey suggest more Increases required,” said Bruna Skarica, UK economist at Morgan Stanley.

According to the CME FedWatch Tool, markets are pricing in a more than 81% chance that the Federal Reserve will decide to hold interest rate hikes at its meeting this week.

The “mini-budget” crisis in UK government bonds, which wreaked havoc on the mortgage market and threatened to topple pension funds, came after former Prime Minister Liz Truss and former Finance Minister Kwasi Kwarteng announced a package of unfunded tax cuts last September .

— CNBC’s Ganesh Rao contributed to this report