Traders bet against early interest rate hike as Mark Carney warns over wage growth
Official figures showed average wage growth at an all-time low of just 0.6% in the quarter to June
Wednesday 13 August 2014
Currency markets bet against an early interest rate rise from the Bank of England as Governor Mark Carney warned a move would depend on a UK wage recovery.
The pound sank nearly a cent to a two-month low of $1.6727 at one stage as the Bank slashed its forecasts for wage growth this year by half to just 1.25 per cent, before picking up more strongly in 2015.
Official figures today showed average wage growth at an all-time low of just 0.6 per cent in the quarter to June, well behind the cost of living and disappointing the Bank’s hopes earlier this year for a strong recovery in real-terms wages in the second half of the year.
Another fall in unemployment, to 6.4 per cent over the quarter to June, prompted the Bank to forecast a bigger fall in the jobless count this year than in May. The Bank has revised down its estimates of slack in the economy but also the level of unemployment which the economy can sustain without fuelling inflation.
But spare capacity is notoriously hard to measure and markets seized on the Governor’s emphasis on anaemic wage growth in betting on when rates will go up.
Carney said: “In light of the heightened uncertainty about the current degree of slack, the (monetary policy) committee will be placing particular importance on the prospective paths for wages and unit labour costs.”
Markets have the first rate rise in seven years pencilled in for February next year, and although wages are expected to pick up slightly in the second half, the emphasis on pay growth makes a November move less likely.
Carney said there was a “wide range of views” on the MPC over the amount of slack in the economy as the debate hots up.
With the economy on course for its strongest growth in seven years but little sign of a hoped-for revival in productivity, dissenters such as hawkish Martin Weale are poised to break the three-year consensus on the committee with votes for interest rate rises this autumn.
Capital Economics economist Samuel Tombs said: “In our opinion, it is still finely balanced as to whether interest rates rise this year.
"But with inflation still looking likely to ease further than the MPC currently expects, we continue to think that interest rates may rise at a slower pace than anticipated by both the Committee and the markets over the coming years.”
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