Wages increased by 2.6% in the three months to January, data from the Office for National Statistics (ONS) today showed.

And inflation eased back to 2.7%, according to data yesterday, meaning that it is now just a touch above wages and still well above the Bank of England’s 2% target.

Monetary policymakers warned in February that interest rates could rise sooner and faster than previously forecast, if the economy continued on the same track.

The bank’s Monetary Policy Committee (MPC) meets this week to set interest rates with the outcome to be announced tomorrow, though May is seen as the most likely time for another rate hike because that meeting will coincide with the launch of the next inflation report.

May rate hike ‘very likely’

Today’s employment figures have reinforced expectations of the MPC raising the base rate from its current level of 0.5%.

Adam Chester, head economist at Lloyds Bank Commercial Banking said: “If there was any doubt that the UK Monetary Policy Committee is likely to sound hawkish when it meets tomorrow, this report dispels it. A May rate rise looks highly likely.”

Employment figures from today added further weight to the view that the next interest rate hike will occur in May, according to Ruth Gregory, UK economist at Capital Economics.

The “rosier picture will give the Bank of England more confidence in raising interest rates,” Laith Khalaf, senior analyst at Hargreaves Lansdown said.

And Tom Stevenson, investment director for personal investing at Fidelity International, added: “Combined with yesterday’s easing back in the Consumer Prices Index by a little more than expected to 2.7%, real wages are close to turning positive again.

“That should make it easier for the Bank of England to raise interest rates from their current low level – almost certainly not this week but very likely in May.

“Wage growth has been the missing link in Britain’s long, slow recovery from the financial crisis.

“It is the key to unlocking a return to monetary normality.”

Article originally posted on Mortgage Solutions