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Economy: Prospect of early rise in interest rates recedes amid weak wage growth data

PUBLISHED: 13:02 13 August 2014 | UPDATED: 13:02 13 August 2014

Governor of the Bank of England Mark Carney (centre) speaks during the bank's quarterly inflation report news conference at the Bank of England, with Deputy Governor Ben Broadbent (left) and Executive Director Jenny Scott, in London.

Governor of the Bank of England Mark Carney (centre) speaks during the bank's quarterly inflation report news conference at the Bank of England, with Deputy Governor Ben Broadbent (left) and Executive Director Jenny Scott, in London.

The Bank of England today ditched its forecast for real-terms wage growth to return this year as it signalled that it was placing increasing emphasis on weak pay data in deciding when to raise interest rates.

Policy-makers halved their prediction for wage growth this year from 2.5% to 1.25%, meaning it will continue to lag behind inflation, figures in the Bank’s quarterly inflation report showed today.

Official quarterly pay data published shortly ahead of the report were even worse than the bank had thought, and therefore likely to dampen speculation about an interest rate rise this year.

The bank’s predictions for the wider economy were better, with UK growth figures upgraded from 3.4% to 3.5% for this year, and from 2.9% to 3% for next year.

Unemployment is expected to drop more quickly, falling below a rate of 6% this year, while inflation projections were little changed, hovering just below 2% over the next three years.

The bank said the key measure of wasteful spare capacity or slack in the economy had narrowed slightly to around 1%, compared to a previous level of around 1.25%.

Slack is the measure that the monetary policy committee (MPC) has said it wants to see narrowed before there can be any increase in interest rates, but there have been contradictory signals about this as real wages fall and jobs grow strongly.

Bank governor Mark Carney said: “In light of the heightened uncertainty about the current degree of slack, the committee will be placing particular importance on the prospective paths for wages and unit labour costs.”

Mr Carney maintained that forward guidance on interest rate policy remained unchanged and there would not be a “magic number” for wage growth that would prompt an increase.

But the shift in emphasis is likely to prompt renewed suggestions that the governor’s changing stance on rates is like the behaviour of an “unreliable boyfriend”.

It comes a year after Mr Carney introduced the first version of forward guidance, which said a rate rise would not be considered until unemployment fell to 7% but which had to be ditched after six months when job numbers improved much more quickly than expected.

The governor said that despite the new emphasis on pay, the MPC “does not have a particular threshold for wage growth” to decide when it considers an increase.

He reiterated that rate rises when they do come would be “gradual and limited” but added that this was “an expectation, not a promise”.

Members of the MPC have been divided over whether an early increase would hamper the recovery by pushing up borrowing costs.Markets are expecting rates to start rising in February but some experts have been pencilling in an increase as early as November.

The bank acknowledged that the weakness in wages meant its key measure of slack had been greater in the past than had previously been thought, though it was now being used up more quickly than had been expected.

There has been contradictory evidence about the level of spare capacity in the economy, with job numbers improving strongly, and Mr Carney today cited an increase of 800,000 jobs in the past year.

The pound fell a cent against both the dollar and the euro on dampened expectations of an early interest rate rise.

Markit chief economist Chris Williamson said: “The report and recent rhetoric from policy-makers gives the impression that rates will not rise until wage growth is showing clear signs of picking up.

“While it seems likely that calls to raise interest rates will start to gather strength in coming months, a majority vote for a rate rise still looks some way off.

“February, therefore, still looks the most likely month for the Bank to dip its toe into the water as far as tightening policy towards more normal levels is concerned, though November remains a possibility if the wages data pick up in coming months.”

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