LONDON, June 13 (Reuters) - Sterling rose on Tuesday as new figures showed wages in Britain's labour market grew sharply and unemployment unexpectedly fell, feeding expectations that the Bank of England will keep raising interest rates this year.
Data from the Office of National Statistics (ONS) on Tuesday showed unexpected strength in salary growth in the three months to April, with wages excluding bonuses 7.2% higher than a year earlier and the minimum wage rising.
The pound rose by as much as 0.52%, before retreating to $1.257, showing a 0.47% gain on the day. Against the euro, sterling was flat at 85.98 pence.
"The key takeaway here is, not only was unemployment not ticking higher, we've got strong jobs growth and also wage growth is just extremely high right now and that's going to be making the Bank of England feel very uncomfortable," City Index senior markets analyst Fiona Cincotta said.
"It does show us that inflation really is quite embedded ... we've got a price-wage spiral which appears to be in full flow," she added.
Cincotta expects the pound to push towards $1.27 or even $1.28 in the short term before deteriorating in the longer term, as tighter credit conditions eventually impact households and businesses.
Fund manager Emma Mogford from Premier Miton Investors said while the latest figures were "broadly good news for the UK economy, this is very challenging for the Bank of England".
Persistently high wage growth makes the Bank of England's task to get inflation back to its 2% target even more difficult, as it leaves less room to bring price pressures down.
"In the context of April’s shock inflation print, this puts significant pressure on the Bank of England to increase rates again at next week’s policy meeting – another 25bp hike seems the most likely option," said Hussain Mehdi, Macro & Investment Strategist at HSBC Asset Management.
Unlike in the U.S., the latest UK figures show no signs that wage pressures are moderating, Mehdi said.
An increase in minimum wage will likely feed back into the economy as households have more cash to spend. However, what remains to be seen is the effects of rising mortgage rates on families' disposable income.
Money managers will be closely watching the U.S. Consumer Price Index (CPI) data, due later on Tuesday, as expectations grow that the Federal Reserve and the BoE will take diverging paths when it comes to interest rate policy.
A 10-year UK gilt now yields more over 10-year U.S. Treasuries than at any point since early 2009, reflecting the extra risk premium investors demand to hold British government debt right now. (Reporting by Farouq Suleiman, editing by Ed Osmond)
