Labour’s plans to boost workers’ pay risk pushing up mortgage bills, HSBC warns

Experts have warned that Labour’s ambition to boost workers’ pay risks stoking inflation – meaning interest rates and mortgage bills could stay higher for longer.

Economists at HSBC said that forcing firms to spend more on wages could drive up prices. 

Alternatively, it could prompt firms to cut jobs, fuelling unemployment, according to an analysis of Labour’s plans by Europe’s biggest bank.

The stark warning threatens to check Labour’s progress in persuading business leaders and financial markets that the prospect of a change of government poses no cause for alarm.

HSBC noted that ‘for now, the party’s efforts to win over the business and economic establishment appear to be paying off’. 

But the bank said there was ‘still scope for non-market friendly surprises’ after the election, including a ‘really bumper increase’ in the national living wage or a rise in capital gains tax.

The bank’s report scrutinised the potential impact of the party’s ‘genuine living wage’ policy, which would mean that the cost of living is, for the first time, used to calculate the minimum wage.

That could drive it up from £11.44 to £12 across the UK and £13.15 for London, HSBC’s economists suggested. 

In a ‘best-case’ scenario that would lure more people back to work, raise productivity, lift tax revenues and result in fewer people claiming benefits.

However, HSBC senior economist Elizabeth Martins said the reality ‘might not be so Panglossian’ – a reference to the absurdly optimistic character Dr Pangloss from Candide, the 18th century satirical novel written by Voltaire.

‘A higher minimum wage could increase costs and reduce efficiency, adding to unit labour costs,’ Martins said.

‘This, in turn, could either push firms into reducing headcount – that is, higher unemployment – and/or sustain lingering inflation pressures, keeping Bank Rate higher for longer. 

While this has been a risk that hasn’t really crystallised since the minimum wage was introduced, at some level it would presumably have a detrimental impact on unemployment – we just don’t know where it is until we reach it.’

Martins also noted that while Labour had ruled out increases in income taxes, national insurance and VAT, it had ‘tellingly’ failed to do so for capital gains tax.

‘Realistically, it is possible that Labour might have to raise taxation, and both Keir Starmer and [shadow chancellor] Rachel Reeves have declined to rule out raising capital gains tax at some point down the line,’ she said.