Tags: bank of england | inflation | wage growth | united kingdom

BOE Sees Inflation Drag Fading as UK Wage Growth Accelerates

Wednesday, 17 June 2015 06:34 AM

Bank of England officials said restraints on the economy and inflation are fading as they weighed the need to continue emergency policy settings.

In the minutes of its June meeting, the Monetary Policy Committee said factors constraining price growth were “likely to dissipate fairly shortly,” and could strengthen “notably” by year-end. Separate data published Wednesday showed pay growth accelerated to the fastest in almost four years.

“The strength of the headwinds to growth had begun to ease,” the MPC said. “As they ease further over time, the interest rate required to keep the economy operating at normal levels of capacity and inflation at the target was likely to continue to rise.”

The tone of the minutes signal a shift in the nine-member MPC’s thinking on policy. While the panel led by Governor Mark Carney again voted unanimously to keep the benchmark interest rate at a record-low 0.5 percent, the minutes dropped a line that there was a range of views on the panel on the likely future path of the rate. It retained a comment that the pace of tightening would be gradual.

“With more evidence the U.K. will not experience a prolonged period of very low inflation, the MPC appears to have switched instead to stressing that the path of interest rates will be upward,” said Niraj Shah, an economist at Bloomberg Intelligence in London. “The tone of the minutes was more hawkish than in recent months, suggesting that unity may only last through the summer.”

Fed Decision

The pound surged and was up 0.5 percent to $1.5729 as of 10:29 a.m. London time. It earlier reached $1.5747, the highest in almost a month. MPC-dated forward Sonia contracts changed the pricing of BOE’s first 25 basis-point rate increase to June 2016 from August 2016.

The BOE also noted that other central banks, such as the Federal Reserve, may also soon begin normalizing policy and that there could be spillovers. Nevertheless, it said the path for the U.K. rate would depend on the prospects for inflation and would “not be determined by the actions of other central banks.”

Economists expect the Fed to keep its rate near zero until September. It will announce its latest policy decision and economic forecasts at 2 p.m. in Washington, and Chair Janet Yellen will hold a press conference 30 minutes later.

In the U.K., the statistics office said total average weekly earnings rose an annual 2.7 percent in the three months through April. That’s up from a revised 2.3 percent in the first quarter and exceeded the median forecast for 2.1 percent. The ILO unemployment rate remained at 5.5 percent, the lowest since 2008.

Wage Growth

The BOE report said the underlying pace of wage growth may be faster than official data. Unless this is accompanied by a pickup in productivity, companies may be forced to raise prices to protect profit margins.

For two MPC members, the June decision was still “finely balanced,” unchanged from recent meetings. Martin Weale and Ian McCafferty this year abandoned their push for higher rates as inflation slowed.

“It may not be that long” before the minority move on from the decision being “finely balanced,” said Philip Shaw, an economist at Investec Securities in London. “On current trends it wouldn’t be surprising if those two individuals shift their votes in the August meeting.”

Against that, it noted the impact of the government’s fiscal squeeze and the continued pressure on inflation from the stronger pound. It also said a disorderly outcome to the Greek crisis remained at “significant risk.”

Britain’s inflation rate crept back above zero in May to 0.1 percent, confirming officials’ projections that any period of deflation would be short lived. The rate was at minus 0.1 percent in April, the lowest in more than 40 years.

Price gains have held below the bank’s 2 percent target since the start of last year. The MPC forecasts they will pick up at the end of the year and move toward the goal in 2016.

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Bank of England officials said restraints on the economy and inflation are fading as they weighed the need to continue emergency policy settings.
bank of england, inflation, wage growth, united kingdom
Wednesday, 17 June 2015 06:34 AM
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