|  Updated: 

FTSE 100 close: London index nips higher as Bank of England rate hike bets step up

Over the course of the week it has gained 2.7 per cent, its strongest performance all year.
Over the course of the week it has gained 2.7 per cent, its strongest performance all year.

London’s FTSE 100 crept higher today as another set of hotter than feared wage numbers pushed pound sterling to its highest level in 15 months.

The capital’s premier index nipped 0.12 per cent higher to 7,282.51 points, while the domestically-focused mid-cap FTSE 250 index, which is more aligned with the health of the UK economy, climbed 0.62 per cent to 18,140.09 points.

Investors were tepidly dipping their toes in the UK stock market today as they digested fresh Office for National Statistics (ONS) data that signalled the inflation fight is far from being won.

Wages over the three months to May on an annual basis in the UK leapt 7.3 per cent, the joint highest acceleration on record and above the City’s expectation of a 7.1 per cent increase.

Rampant pay growth is raising the risk of inflation – stuck at 8.7 per cent – staying higher for longer, potentially forcing the Bank into another big rate increase next month.

“The previous 50 basis point hike by the BoE [in June] was the recession hike and now it needs to follow that up with another jumbo hike,” Neil Wilson, chief market analyst at Finalto, said.

There are signs the UK economy is suffering from both sky high wage growth and rising unemployment. Usually, when joblessness rises, pay growth cools due to employees having to curb their wage demands to secure a job.

Unemployment jumped unexpectedly to four per cent from 3.8 per cent,

“With the jobless toll creeping up, employees may already be more reticent about demanding hikes in wages, and bosses may be less inclined to pay big for new hirings.  That will certainly be the hope of Bank of England governor Andrew Baile,” Susannah Streeter, head of money and markets at Hargreaves Lansdown, said.

Markets now think there is an around 70 per cent chance the Bank will vote for a 50 basis point increase on 3 August, which would lift borrowing costs to 5.5 per cent. Analysts think the peak could be around 6.5 per cent.

Gilt yields inched higher. The rate on the 2-year instrument added three basis points to trade at 5.41 per cent. Prices and yields move inversely.

Pound sterling surged on amplifying rate hike bets. It strengthened to $1.29 during morning exchanges. its highest level against the US dollar in 15 months, before giving up some of those gains.

There was little in the way of price action in the City today.

Asia-exposed shares led the FTSE 100 lower, with HSBC, Standard Chartered and Prudential all finishing the day near to the bottom of the index.