By Samuel Indyk and Joice Alves
LONDON (Reuters) -Sterling rose against the dollar on Tuesday after data showed British wages grew at a record pace in the second quarter, adding to the Bank of England’s inflation worries, though gains were capped by some signs of a cooling labour market.
Wages excluding bonuses were 7.8% higher than a year earlier in the three months to June, representing the highest annual growth rate since comparable records began in 2001, the Office for National Statistics said.
Economists polled by Reuters had forecast a 7.4% rise.
But the data also showed some fresh signs of cooling in the job market with the unemployment rate unexpectedly rising to 4.2% from 4%, the highest since the three months to October 2021 and climbing more quickly than the BoE has forecast.
“It was the proverbial mixed bag with some weaker activity data but still no signs that weaker activity is starting to weigh on earnings growth,” said Adam Cole, chief currency strategist at RBC Capital Markets.
“Sterling is caught between the two and hasn’t had much of independent direction,” Cole added.
The pound was last 0.3% higher versus the dollar at $1.2723, but was little changed against the euro, with the euro last buying 85.97 pence.
The , which measures the currency against six peers including the pound and euro, was down 0.2%.
Money market traders are now fully pricing in a 25 basis point hike from the Bank of England at its September meeting, with around a 12% chance they raise rates by 50 basis points.
Traders also price a total of 75 basis points of tightening from the central bank by March next year, which would take the bank rate to 6%, on worries that higher pay growth will fuel prices further down the line.
“Wage growth in June accelerated … reinforcing concerns that second round inflationary effects have crystalized,” Lloyds Banking Group (LON:) UK economist Emma Wilks said.
“The upside surprise in pay growth adds to concerns of persistent price pressures,” Wilks added, saying they expect another 25 basis point hike in September.
BoE Governor Andrew Bailey said earlier this month that the rate of pay growth was “materially above” the central bank’s forecasts but the BoE also signaled it was getting close to pausing its run of interest rate increases.
The next input for the BoE is inflation data for July, with consumer prices likely to have moderated further last month, official data is expected to show on Wednesday.
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