What rocketing pay means for mortgage rates as latest figures revealed

Wages have increased to their highest level in almost two-and-a-half years, according to official figures, raising questions about whether the Bank of England will press ahead with an expected cut to interest rates this summer.

The latest numbers from the Office for National Statistics (ONS) show average regular pay, excluding bonuses, stood at 6 per cent in the three months to February compared with 12 months earlier.

In real terms, when the rate of inflation is factored in, wage growth by the same measure was 2.4 per cent – the highest level since July 2021, the ONS said.

Rising wages are good for workers but this can also push up the price of goods and services, causing inflation, something the UK central bank has tried to control by pushing up interest rates.

While this is welcome news for households still battling with a cost-of-living crisis, the figures could delay the Bank’s much-anticipated interest rate cut, which would relieve the pressure on mortgage costs.

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Currently, the base rate is 5.25 per cent. It has been forecast to drop to 5 per cent by the summer with economists predicting June at the earliest.

Mortgage holders with tracker mortgages, which tend to follow the base rate, and those on fixed-term contracts coming to an end are still being hit with higher monthly payments as a result of a higher base rate.

If interest rates come down, then homeowners on these deals will hopefully see their monthly payments fall.

Currently, the average two-year fixed rate mortgage rate today is 5.81 per cent while a five-year fix is 5.39 per cent. Homeowners will be hoping for a return to rates of around 4 per cent.

However, if a rate cut is delayed until August, it would come uncomfortably close to the expected general election date of October or November for its impact to be felt in people’s pockets or to help the wider economy.

Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, the wealth manager, said: “In real terms, regular salaries jumped 1.9 per cent and total pay 1.6 per cent once inflation is factored in – the highest rate in almost two-and-a-half years, which means incomes are comfortably outstripping price rises.

“This may not bode well for households pinning their hopes on an imminent interest rate cut to ease their borrowing costs.”

The 6 per cent rise was higher than the 5.8 per cent expected by economists but just slightly lower than the 6.1 per cent notched up the previous month.

However, other economists believe the news still means there will be a rate cut in the summer.

Paul Dales, chief UK economist at Capital Economics, said: “With employment falling sharply and the unemployment rate climbing, we suspect wage growth will continue to ease in the coming months. That may allow the Bank to cut interest rates in June.”

Yael Selfin, chief economist at KPMG UK, added: “Easing pressure in the labour market keeps the Bank on track for a summer rate cut.”

Some economists have pushed back their bets as to when the Bank of England may start lowering rates, with the consensus being that reductions will now start in August or September.

The next Bank of England Monetary Policy Committee meeting – where decisions over whether to change rates are taken – is at the start of May. This is followed by a meeting in June, and a further one in August.

The ONS has also cautioned against the reliability of the jobs market data due to a plunge in the number of responses it receives to its surveys.