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Interest rate rise becomes less likely

A summer rise in UK interest rates looks less likely, after data showed slower wage inflation despite a fresh fall in unemployment.

Annual growth in regular pay - excluding bonuses - was 2.8% in the three months to the end of April, down from 2.9% previously, according to the Office for National Statistics. Including bonuses, pay growth slowed from 2.6% to 2.5%.

The pay slowdown came despite the number of unemployed workers in the UK falling by 38,000 from the previous quarter.

Chancellor Philip Hammond said: “Our labour market goes from strength to strength. Employment has reached a new record while regular wages are rising faster than inflation.”

Consumer inflation was unchanged at 2.4% in May even as petrol prices jumped sharply, said the ONS. 

Bank of England officials have made a case for raising interest rates on the basis that accelerating wage growth could feed through into rising inflation. The latest data appear to undermine this case.

As well as slower wage growth and unchanged inflation, official figures showed a sharp fall in the output of the UK’s manufacturing industries, with production falling at the fastest rate since 2012 during April.

Victoria Clarke, an economist with Investec, said the “softer” pay growth and weak manufacturing figures “gives the BoE further reason to wait and see”.

“We pushed back our expected timing of the next increase in [interest rates] from August to November, following the output and construction figures,” she said.

The trade deficit also expanded in April to its highest level since 2016, as exports fell faster than the imports. The UK’s trade gap widened to £9.7bn from £7.8bn in March.

Meanwhile, sunshine and royal wedding celebrations brought relief to Britain’s struggling retail sector. Retail sales volumes increased by 1.3% compared with April, the ONS said. The May increase follows April’s 1.6% rise and suggests that consumers opened their wallets following a period of belt tightening and poor weather in the first quarter of the year.

“The truth is that despite continued rumours of the demise of our retail industry, many retailers are simply getting on with the job and continuing to attract customers through their doors.” said Ian Gilmartin, head of retail at Barclays corporate banking.

“Of course, we’re not going to have a heatwave and a royal wedding to help drive sales every month, but the World Cup kick-off should help supermarkets, in particular, maintain this momentum over the next month or so.”

In the US, the Federal Reserve raised interest rates again by 0.25 percentage points and signalled two more increases this year - one more than previously forecast. Explaining the decision to raise rates to a range of 1.75% to 2%, Fed chairman Jay Powell said the US economy “is doing very well”.

The European Central Bank (ECB) also announced that it would end quantitative easing (QE) this year.


Click here to read this week's Market Roundup and Company Focus on British American Tobacco

 
Important Notes:

Main source of information: Company Report and Accounts, Bloomberg

 

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