Not much pay worry in these Bank of England forecasts

May 13, 2015

?????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????The Bank of England has told us time and time again that pay growth is key to the interest rate outlook.

The latest official data suggested that pay is starting to pick up — excluding bonuses, it accelerated to 2.2 percent in the 3 months to March on a year ago based on a single-month surge in March to 2.7 percent. It was slightly above consensus expectations for a 2.1 percent rise.

But the central bank doesn’t sound too worried yet, even with the unemployment rate now down to 5.5 percent. The latest Inflation Report downgraded the outlook for wage growth this year to 2.5 percent from 3.5 percent, suggesting UK rates are not going to rise from a record low of 0.5 percent any time soon, probably not for another year.

In the near term, pay growth is expected to strengthen, driven by the narrowing in slack and a pickup in productivity growth, and as the temporary factors weighing on pay growth — such as compositional effects and subdued job turnover — diminish. The continued weakness in wage growth has led the MPC to reassess the persistence of the factors dragging on pay growth, and in particular the possibility that the compositional effects may be slow to fade. As a consequence, wage growth is expected to pick up at a slower rate than at the time of the February Report. The uncertainty around the path for wages is considerable.

It adds later on:

Moreover, wage growth may be a little less sensitive to domestic labour market slack if it is also influenced by the potential supply of labour in other countries, and therefore economic conditions outside the United Kingdom. The factors holding wage growth back could prove more persistent — for example, if low inflation affects wage settlements. They could, however, unwind more quickly and wage pressures could pick up quite sharply as unemployment falls towards its long-run rate.

IR May wage projections













BoE Governor Mark Carney said at the May Inflation Report press conference that one of the key risks is wage growth remains subdued for longer than the bank expects.

Wage inflation downgradesIndeed, it hasn’t had a great recent track record in predicting a pickup in wage inflation. This time last year, it was forecasting 2.5 percent wage growth in 2014. That was cut in half to 1.25 percent last August.

The latest Reuters poll consensus is for a rate hike in Q1, with financial markets betting it might be a little later. With the BoE broadly endorsing the market view, the first rate hike may well get pushed even further into the future.

 (Blog updated with full history of Inflation Report average earnings forecasts and latest table.)

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