Bank of England eyes wage puzzle as it mulls when to raise rates
LONDON
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Pedestrians walk past the Bank of England in the City of London May 15, 2014.
Credit: Reuters/Luke MacGregor
The nine members of the Monetary Policy Committee were unanimous when they voted to keep interest rates on hold at their July 9-10 meeting, as forecast by a Reuters poll.
Sterling fell and British government bonds underperformed German debt after the release of the minutes, which offered little to bolster expectations among many in the market that a rate rise will come later this year.
The Bank also said there were signs, most clearly in the housing market, that Britain's growth - which has been the fastest among the world's big rich economies - would slow a bit in the second half of 2014.
Much of the MPC's discussion centred on the confusing picture from Britain's labour market, which has seen rapid job creation and the highest ever number of people in work, but also some of the slowest wage growth in years.
Policymakers were unsure if this reflected a slightly longer than normal lag between unemployment falling and wages starting to rise, or if the economy and employment had more scope to grow before consumer price inflation rose.
The minutes raised the possibility that the MPC might focus more on wage growth in future.
"Given the contradictory signals from employment and wages, uncertainty about the degree of slack had risen on the month and ... an argument could be made for putting more stress on the expected path of costs, particularly wages, in assessing inflationary pressures," the minutes said.
Data released after the MPC met showed that annual wage growth fell to a five-year low of 0.3 percent in the three months to May, though tax changes have muddied the data.
Many people in the financial markets expect interest rates to rise before the end of the year, and most economists polled by Reuters forecast a rate rise before March.
BoE Governor Mark Carney said last week that he did not know exactly when interest rates would start to rise for the first time since 2007, as it hinged on economic data. But he reiterated that the pace of rate rises would gradual - views that were shared more widely in the minutes.
MORE DOVISH?
David Tinsley, an economist at BNP Paribas who expects rates to rise this year, said an early move had become slightly less likely due to recent economic developments and the minutes.
"I thought they were a fairly dovish set of minutes," he said. "The discussion on (absent) pay growth ... would be an argument at face value for delaying tightening."
The minutes did not include an estimate for how much slack the MPC thought was in the economy.
In May the BoE estimated it at 1.0-1.5 percent of gross domestic product, but incoming deputy governor Minouche Shafik told legislators at a confirmation hearing that she thought it could be revised down in August's forecast update.
The MPC said economic growth was becoming more assured, and that BoE staff estimated GDP had grown 0.9 percent in the past three months - similar to the first three months of the year.
But there were tentative signs the economy was starting to slow going into the second half of the year, as well as weakness in the United States and the euro zone.
"News about the central outlook for the global economy had been to the downside over the month, and upside risks to activity seemed to have diminished somewhat," the BoE said.
The number of mortgages approved fell to an 11-month low in May, though figures on Wednesday from the British Bankers' Association - which cover a subset of lenders - showed a rise in June.
Some policymakers did see more of a case for a rate rise. For them, uncertainties about the amount of slack in the economy meant it was better to focus on the rapid rate at which it was being used up. They also cited private sector surveys which report much faster wage growth than the official data.
"A rise in Bank Rate at a time when the economy was growing strongly would facilitate a more gradual path thereafter and would allow the Committee to evaluate the sensitivity of households, firms and financial markets to changes in interest rates," the minutes said.
But other policymakers thought this could be dangerous at a time when there were signs of weakness in the global economy and British wages were lagging behind inflation, and an unexpected rate rise could have an outsize impact on the recovery.
(Editing by Catherine Evans)
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