The pound hit its highest level in 15 months today and Citytraders doubled down on bets for more Bank of England rate hikes after data on wage rises powered through forecasts.
Sterling peaked at $1.2913 after the wages data, taking it up by over half a cent on the day.
The rally came as financial markets moved to factor in a higher peak for UK rates, with inflation looking likely to stick at high levels and both the Chancellor and the Governor of the Bank of England repeating their determination to tame the upward spiral in prices.
Traders were placing bets that the BOE would go for another super-sized half-point rate rise at its next meeting in August. That would be the fourteenth consecutive hike of any size and the second straight half-point hike.
Markets were also pricing in an interest rate peak of 6.5%, probably early next year. The outlook faces its next test from the number at the centre of the BOE’s bitter struggle: consumer price inflation (CPI) data due next week.
James Smith, developed markets economist at ING, said the numbers “could push the Bank of England into another [half-point] rate hike,” adding:
“These trends have been on display for several months now, and policymakers are losing confidence that they will translate into lower inflation. The BoE is focused squarely on the official pay and CPI data as it emerges.”
The prospect of further jumbo BOE hikes to a higher peak rippled through markets for home loans. It sent the cost of mortages even higher, piling more pressure on homeowners.
Two-year mortgage rates hit a 15-year high of 6.66% today, surpassing the levels reached during the wake of last year’s mini-Budget.
Lenders pulled 300 products from the market today, bringing the number on offer to the lowest level in five months, in a sign that the cost of home loans has further to rise. Two-year mortgage rates have jumped by 1.3 percentage points in the last six weeks alone. Five-year rates also rose, to 6.17%, but remain below last year’s highs.
Danni Hewson, AJ Bell head of financial analysis, said: “With mortgage rates spiralling the cost-of-living crisis is evolving, and many people who’d been able to tread water thanks to savings or a decent level of discretionary income are now feeling the increasingly painful squeeze.”
Today’s wages numbers showed that regular pay was up 7.3% in May, a record rise, defying forecasts for a fall to 7.1%.
Joshua Mahony at Scope Markets said it was “yet another warning to the Bank of England,” adding: “the incessant growth in wages threatens to create an inflationary spiral that pushes prices higher yet. The BOE looks to be backed into a corner.”
