Outlook: Why Bank can feel quietly satisfied

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The Independent Online
WHEN Tim Holt, director of the Office for National Statistics, apologised yesterday for the fiasco his organisation had made of calculating and revising official figures for average earnings, he would have added an extra, silent message of contrition to the Bank of England. All users expect official statistics to be accurate and reliable, but it is crucial for the Bank's judgement about interest rates.

The reason is that official figures are the only defence against anecdotal evidence, the heavy artillery used by business lobby groups and industry in their attack on the MPC's decisions. Any industrialist or manufacturing union can reel off job losses here and low pay settlements there. The Bank can only set what it thinks will be the right rate for the whole economy by having the full picture, and the only way to get the full picture is to look at comprehensive, national data based on a wide sample, properly weighted and adjusted for seasonal fluctuations.

When the MPC raised interest rates to their peak of 7.5 per cent in June, the official average earnings figures were the last piece of a jigsaw portraying a generally tight labour market. Although not decisive in themselves, they helped tip the balance of argument in the monetary meeting. But the move was so unpopular with the business lobby that there was general rejoicing - and later fury in Threadneedle Street - when the ONS revised the figures to show average earnings growth slowing rather than accelerating in the spring.

The Bank can now feel quietly satisfied that what looks to have been a very thorough review of the average earnings figures has resulted in a series that looks much more like the original picture before the ONS started fiddling with it.

The context is now wholly different, however. Growth has slowed to near standstill, the international backdrop is as depressed as ever, and inflation remains near its target. So although pay is rising at an underlying rate of 4.5 per cent, the Bank's tolerance limit, it does not have the automatic implication that interest rates won't fall again.

In fact, the downward trend in earnings, albeit from a higher than expected peak, encouraged the financial markets to be a bit more hopeful yesterday about the possibility of a rate cut. News about economic activity since last month's MPC meeting has been more upbeat. On the other hand, there remains no sign of inflationary pressure.

The complicating factor this month is next week's Budget. The MPC will already know its broad outline so that it can base its judgement on whatever fiscal stance the Chancellor has decided to adopt. The committee might calculate that if it does cut rates, this will be read as a vote of no- confidence in growth prospects. And if it doesn't cut rates, this might be taken as a sign of a loosening of fiscal policy to come. In these circumstances, the only proper course for the MPC is to ignore how its actions might be interpreted, and simply weigh up all the hard facts - with a bit more confidence in their accuracy after yesterday's review.