Pay growth adds to pressure for interest rate rise ...

Average pay rose by 7.4 per cent in May, according to labour market data released by the Office for National Statistics today. The month data was down from 7.8 per cent in April. The three month average rate moved higher to 6.9% up from 6.7%.

Doves will note, unemployment increased by 65,000 to 1.370 million. The unemployment rate increased to 4.0%. Employment dropped, redundancies increased and vacancies fell. The monetary medicine appears to be working albeit slowly.

The hawks will focus on the earnings data. Average pay rose by 7.4 per cent. Private sector pay increased by 7.7%. Service sector pay increased by 7.6%. Funds for finance fat cats in the financial sector increased by 9.2%.

Public sector pay was up by 5.8%. Construction pay was restricted to 4%. No wonder vacancies are increasing in retail. The rate of pay gain for retail workers was less than 4%.

Where Are Rates Headed? Bet on Higher for Longer —Here and Everywhere … prices and labour costs are weighing on central bankers despite fears of instability in the U.S. regional banking sector and the prospects of recession in Europe and the U.K.  

Andrew Bailey has warned that interest rates will continue to rise. Both the Chancellor and the Governor have urged pay restraint. The Bank of England may raise rates by as much as 50 basis points when the monetary policy committee meets early next month. Real wage cuts for workers, no return to the Gold Standard but the pound has risen sharply since the release of the data trading at $1.2923 as we write.

Capital Economics suggest “Our forecast is for the Bank to raise interest rates by 25 basis points in August … but we can’t rule out another 50 basis points hike. Much will depend on June’s CPI inflation data.”

"In the  latest update Bloomberg economists expect the Bank of England will push the UK into recession by the end of the year. A year-long recession will hit Britain in the final three months of the year assuming the Bank of England raises interest rates to 5.75% by November.

JP Morgan said its central forecast was for rates to peak at a lower level of 5.75% by November, but warned rates could go higher, possibly to 7% under “some scenarios”. "The Bank of England could be forced to push interest rates as high as 7 per cent and “raise the odds” of a recession to bring down inflation." said Allan Monks, economist.

Three month gilts trade at 5.4%. Six months gilts trade at 5.8%. For the moment we are adjusting our base rate peak this year to 5.5% on the basis of two 25 basis point hikes in August and September. Bloomberg forecasts rates at 5.75% by the end of the year. JP Morgan thinks rates could hit 7%. Markets are pricing in at least another 125 basis points to reach 6.25%. It all seems a bit of a stretch.

We model 4.50% as the long run rate in life after Planet ZIRP.

In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year bond yields averaged 4.50%. Ten year gilts currently trade at 4.64%. 30 year gilts trade at 4.68.

No return to the era of zero rates. No return to Planet ZIRP. No return to the "Forbidden Planet".  Where Are Rates Headed? Bet on Higher for Longer —Here and Everywhere. Follow our weekly updates with our Saturday Economist Friday Forward Guidance.