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UK Economy
MPC’s focus remains on wage growth
From the Financial Times of Wed, 17 Dec 2014 11:23:27 GMT

The majority of members on the Bank of England’s rate-setting committee want to see more evidence of pay growth before voting to raise interest rates.

Members of the Monetary Policy Committee remain split seven-to-two with the minority — Martin Weale and Ian McCafferty — still voting for an immediate rise.

The latest minutes record that while the majority point to “promising” signs of a recent pick-up in wage growth, they believe that so far it has only been in line with, rather than in excess of, productivity growth, meaning that it is not stoking inflation.

“Consequently, domestic cost growth remained lower than would be consistent with the inflation target. Further increases in pay growth, as labour market slack continued to decline, would be required to be consistent with the 2 per cent inflation target in the medium term,” the minutes record.

Data earlier on Wednesday from the Office for National Statistics confirmed signs that wage growth was finally beginning to outstrip inflation, delivering small real-terms increases to individuals.

Weekly pay for employees was 1.4 per cent higher in the three months to October, and 1.6 per cent higher excluding bonuses. Both are higher than inflation, which has slowed to just 1 per cent.

Howard Archer, chief economist at IHS Global Insight, said that while there was evidence of some momentum in earnings “it is currently limited and from a low base”.

“It is now a racing certainty that there will not be an interest rate hike before the May 2015 general election”, he added, suggesting there is a chance rises could even be delayed as late as 2016.

The minutes show the BoE believes inflation will be weaker than forecast at the last inflation report, mainly because of falling oil and food prices. It expects inflation to fall below 1 per cent in December and remain the threshold “for some months after that”.

This means governor Mark Carney will have to write a letter to the chancellor to explain the undershoot below the BoE’s 2 per cent target.

The two dissenters emphasised that as monetary policy always operates with a lag, rates must rise now to anticipate a sharp bounce in wage growth as unemployment continues to fall and slack in the labour market reduces. The minutes note that data on private sector earnings suggests “raised the possibility that this process was already in train”.

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