Key Bond Yield Nears 15-Year High Amid Inflation Concerns

A key bond yield has surged close to a 15-year high, following the release of jobs data that suggests the Bank of England (BoE) may need to raise interest rates in order to combat inflation.

According to the Office for National Statistics, the annual growth in employees’ average total pay, including bonuses, was 6.9% in the three months leading up to May. This figure, revised from a previous estimation of 6.7% for the three months prior, exceeded economists’ forecasted increase of 6.8%.

Bank of England Governor Andrew Bailey highlighted in a recent speech that the resilience of the British economy has intensified wage and demand pressures, resulting in persistent high inflation rates.

While currently lower than the double-digit figures observed a few months ago, consumer price inflation in the UK remains at 8.7%, more than four times the BoE’s desired target of 2%.

James Smith, a developed market economist at ING, commented on the latest wage data, stating, “The latest UK wage data is a blow for the Bank of England in its battle against high inflation.” However, Smith did acknowledge some progress as the number of inactive individuals in the workforce continues to decrease.

Market expectations indicate that the central bank will raise interest rates from the current rate of 5% to a peak of 6.5% in an effort to curb demand and reduce inflation.

As speculations of further rate hikes loom, the British pound (GBPUSD) has surpassed $1.29 for the first time since April 2022. Simultaneously, the policy-sensitive 2-year gilt yield (TMBMKGB-02Y) has increased by a basis point to 5.361%, reaching its highest level since the financial crisis 15 years ago.

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