Pound jumps as gilt yields hit 2008 highs after wage shocker

The pound rose on Tuesday, after data showed wages in Britain are growing far more quickly than expected, heaping pressure on the Bank of England to raise rates, which in turn pushed the government’s borrowing costs to their highest since 2008.

Data from the Office of National Statistics (ONS) on Tuesday showed UK wages in the three months to April grew at their fastest pace on record, excluding during the pandemic, at a clip of 7.2%, after an increase in the national minimum wage.

The BoE meets next week to discuss monetary policy. With inflation running above 8% and households and businesses grappling with a cost-of-living crisis, the central bank must contain price growth without triggering a recession.

British two-year gilt yields hit as much as 4.84%, their highest since the 2008 financial crisis on Tuesday, surpassing the peak in September under Britain’s shortest-serving Prime Minister Liz Truss following her largely unfunded mini-budget.

“The market is saying the BoE is just going to have to keep raising rates,” Michael Brown, a markets strategist at broker TraderX said.

“We’re going to end up with a much bigger interest-rate burden at a government level and at an individual level,” Brown said.

Typically, there is a lag of several months between a central bank raising interest rates and the impact on the real economy. The effects of the BoE’s series of rate hikes is now filtering through, especially as fixed-rate home loans come up for renewal.

A number of major lenders, including HSBC (LON:HSBA), have withdrawn mortgage products for customers applying via broker services, reflecting the broader impact on Britain’s housing market of higher borrowing costs.

Others, such as Nationwide Building Society (LON:NBS), have raised their mortgage rates, along with NatWest (LON:NWG) and Santander (BME:SAN), according to Britain’s Guardian newspaper.

Jefferies interest rate strategist Mohit Kumar said gilts have come under pressure due to reports of lenders pulling deals and the uncertainty in modelling the impact of higher mortgage rates, particularly given the rise in near-dated gilt yields.

Kumar said the BoE was in a difficult position as “there is a large refinancing wave in the June to September period,” which means the central bank may not have room to hike aggressively.

Meanwhile, the pound rose by as much as 0.52%, before retreating to $1.257, showing a 0.45% gain on the day.

A 10-year UK gilt now yields more over 10-year U.S. Treasuries than at any point since early 2009, reflecting the extra risk premium investors demand to hold British government debt right now, theoretically giving the pound an edge.

Persistently high wage growth makes the BoE’s task to get inflation back to its 2% target even more difficult, as it leaves less room to bring price pressures down.

“In the context of April’s shock inflation print, this puts significant pressure on the Bank of England to increase rates again at next week’s policy meeting – another 25bp hike seems the most likely option,” said Hussain Mehdi, macro & investment strategist at HSBC Asset Management.

Unlike in the U.S., the latest UK figures show no signs that wage pressures are moderating, Mehdi said.

Money managers will be closely watching the U.S. Consumer Price Index (CPI) data, due later on Tuesday, as expectations grow that the Federal Reserve and the BoE will take diverging paths when it comes to interest rate policy.

“The problem is that if the BoE raises rates, it’s probably going to have a relatively limited impact on inflation,” TraderX’s Brown said. “This isn’t early 2022, late 2021, where central banks still had a bit of a chance to get ahead of the problem. This is central banks chasing their tail, having been caught on the hop,” he said.