UK short-term borrowing costs shoot past ‘mini-budget’ crisis levels on strong labor data

LONDON — U.K. borrowing costs, as measured by the yield on short-dated government bonds, rose above levels last seen following Britain’s market-destabilizing “mini-budget” after labor market data showed rising wage growth on Tuesday.

The yield on two-year gilts hit 4.754% at 10:13 a.m. London time, according to Refinitiv data, surpassing the 4.750% level set on Sept. 28.

It is the highest level since late Aug. 2008.

U.K. annual average wage growth excluding bonuses accelerated from 6.6% to 7.2% in the February-April quarter. Economists polled by Reuters had expected 6.8% wage growth for the reported first period since the national hourly minimum wage was increased to £10.42 ($13.1), from £9.50.

Real pay, adjusted for inflation, showed pay growth was down by 2% including bonuses, and by 1.3% excluding them.

The report from the British Office for National Statistics showed the employment rate rose 0.2 percentage points over the same period, as the number of people in work hit a record high. Unemployment was 0.1 percentage points higher because of a decline in the number of “economically inactive” people not in work or looking for work.

Economists were quick to forecast a sharp rise in gilt yields on the back of the data, which fueled expectations for the Bank of England’s rate hikes.

Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, said the numbers were “fanning the impression that the U.K. has a unique problem with ingrained high inflation.”

The central bank is attempting to tame price rises that are among the steepest of all developed economies, coming in at 8.7% in April.

“While we think next week’s inflation print will be softer and, more broadly, we see inflation releases ahead of the August meeting as more in line with the BoE’s expectations from May, the April beat and today’s Labour Force Survey beat imply more hikes will be needed,” said Bruna Skarica, U.K. economist at Morgan Stanley.

It comes as markets price in a more than 81% chance the U.S. Federal Reserve will opt to pause rate increases at its meeting this week, according to the CME FedWatch Tool.

The “mini budget” crisis in gilts that sparked chaos in the mortgage market and threatened to topple pension funds occurred after former Prime Minister Liz Truss and former Finance Minister Kwasi Kwarteng’s announced a package of unfunded tax cuts in September last year.