Tepid UK wage growth may end calls for early BoE hike

February 17, 2016

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Wednesday’s British pay data showing wages rose only 1.9 percent in the fourth quarter could well be the straw that broke the camel’s back for anyone still expecting the Bank of England to raise interest rates anytime soon.

Last month BoE Governor Mark Carney said he was looking for a pick up in underlying price pressures – chiefly wage growth – before considering a rate hike, having previously suggested 3 percent was needed before any policy action.

“The soft UK pay growth shown in today’s labour market figures – which is still at odds with the tightening labour market – highlights why the MPC won’t be raising rates anytime soon,” said Ruth Miller at Capital Economics.

In the first three weeks of 2016 economists twice pushed back when they thought the Monetary Policy Committee would raise Bank Rate from a record low 0.5 percent and now don’t expect a move until the dying months of the year.

Financial markets are even more cautious and haven’t priced in an increase for several years.

While the latest increase was this time in line with the Reuters poll median forecast, economists have been over guessing just how much wages have risen since August.

UK avg earns vs polls

Still, as inflation only picked up to 0.3 percent in January from December’s 0.2 percent it means wages are rising faster than prices.

And the number of people out of work remained unchanged at 5.1 percent in the final quarter of 2015, matching the three months to November which was the lowest since mid-2005. The number of people claiming unemployment benefits was at its lowest since 1975.

“The UK’s strong employment remains one of the few bright spots in a world where there are an increasing number of economic uncertainties,” said James Sproule at the Institute of Directors.

“Moreover, with inflation still in the doldrums, real wage growth is providing a boost to employees and underpinning the UK’s consumer-led growth throughout 2016.”

Yet the Bank wants inflation at 2 percent – and according to the latest Reuters poll it will be well into 2017 before it even gets near there.

Additional reporting by Deepti Govind

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