"A May increase now appears a near-certainty. But after that I think the path for UK rates will be one of gradual increases, with a much lower peak than we’ve seen "
Markets are now pricing in an 85% chance of a rate rise as new wage figures from the ONS reinforce expectations the Bank of England will lift interest rates at its May policy meeting.
The ONS data shows that wages are growing at their fastest rate in nearly three years and the unemployment rate fell to 4.2%, its lowest rate since 1975.
Ben Brettell, senior economist at Hargreaves Lansdown, commented: "Pay grew 2.8% in the three months to February. The squeeze on incomes isn’t quite over, as prices rose at an annual rate of 2.9% during that period. But with inflation currently running at 2.7%, and expected to fall towards 2% this year, it looks certain we’ll see real wages start to grow again in the coming months.
"We should remember the Bank faces a delicate balancing act. Inflation seems set to fall back towards target, but a pick-up in wage growth points to an erosion of slack in the labour market. This raises the prospect that a wage-price spiral could push inflation back up in future. But household debt levels remain worryingly high, and Brexit-related uncertainty hangs over the economy like the sword of Damocles. Both will sound a note of caution in Threadneedle Street.
"A May increase now appears a near-certainty. But after that I think the path for UK rates will be one of gradual increases, with a much lower peak than we’ve seen in previous interest rate cycles."
Jacob Deppe, head of trading at online trading platform Infinox, added: “While tomorrow’s Consumer Price Inflation figure is expected to have fallen again, the fall is forecast to be more muted than last month and there’s a chance that wage rises could mean CPI ticks up again later in the year.
“Meanwhile, first quarter GDP figures due next week are unlikely to be that helpful a guide. Most expect GDP to have been no higher than 0.2% in the first quarter but that’s largely down to the effect of the very cold weather, so it may not provide a true picture of the overall health of the UK economy.
“That leaves the Bank of England’s Monetary Policy Committee with a quandary. Does it raise interest rates in May in the belief that wages are rising, the economy is more resilient than first quarter data suggests and that CPI is likely to rise again in the coming months, or stay its hand and wait for more data?
“While the MPC isn’t known for taking gambles, the current climate may force it to do so. A May rate hike still seems likely after today, but the Committee might prefer to have to do so with more solid evidence than it will probably have available to it.”