Investors digging through minutes of the last Bank of England policy meeting discovered a new reason to hold onto their gilts: a stronger focus on wages.
The notes showed a policy board more open to using pay as a predictor of future inflation. And since salary growth has been almost stagnant, investors took this as a signal that the next interest rate increase may come later than expected. The pound fell for a sixth day against the dollar, erasing an intraday advance, and U.K. government bonds rose as the minutes also showed the Monetary Policy Committee voted unanimously to hold borrowing costs at a record-low at the July 9-10 meeting.
“The BOE is very data-dependent now, and if inflation and wage growth stays low the BOE is likely to delay raising rates until the early part of next year,” said Paul Robson, a senior foreign-exchange strategist at Royal Bank of Scotland Group Plc in London. “I’m not surprised that sterling has taken back some of those early gains.”
The pound declined 0.2 percent to $1.7034 at 5:15 p.m. London time after earlier rising as much as 0.2 percent. The U.K. currency weakened 0.1 percent to 79.02 pence per euro after appreciating to the strongest level since August 2012.
Benchmark 10-year gilt yields fell three basis points, 0.03 percentage points, to 2.55 percent. The rate reached 2.54 percent earlier, the lowest since May 29. The 2.25 percent bond maturing in September 2023 rose 0.24 or 2.40 pounds per 1,000-pound ($1,703) face amount, to 97.53. As 10-year yields slid to an eight-week low, short-sterling futures climbed.
While U.K. inflation accelerated in June, separate data last week indicated pay excluding bonuses rose in the three months through May at the slowest pace since records began in 2001. Some BOE policy officials have started to argue that the risk of a rate increase undermining the recovery has diminished as growth becomes more entrenched, according to the minutes. Others saw little indication of inflationary pressures building.
“Given the contradictory signals from employment and wages, uncertainty about the degree of slack had risen on the month,” according to today’s minutes. “In light of this uncertainty, an argument could be made for putting more stress on the expected path of costs, particularly wages, in assessing inflationary pressures.”
Wages suggest labor supply is greater than the bank initially expected, while spare capacity is also being used up faster than it first thought, Carney said in a speech in Glasgow, Scotland, today, echoing the minutes. A key point in the assessment will be how this translates into the pace of real pay increases, he said.
Investors had been betting the Bank of England would be the first major central bank to increase borrowing costs, explaining partly why gilts have trailed several of their European peers this year. They returned 4.6 percent through yesterday, compared with euro-area bonds earning 7.9 percent, as the European Central Bank increased monetary stimulus in a bid to boost the economy and stoke inflation.
Pay excluding bonuses rose 0.7 percent in the three months through May from a year earlier, government data published on July 16 showed. As recently as May, the BOE expected earnings growth to approach 2.5 percent by the fourth quarter. Consumer-price inflation rose 1.9 percent in June.
The implied yield on short-sterling futures contracts expiring in June 2015 fell two basis points to 1.27 percent, suggesting traders were reducing bets on higher borrowing costs. Yields on two-year gilts, seen as most sensitive to interest-rate expectations, dropped two basis points to 0.82 percent.
“The market was excited for any hawkish influences or dissent following from last week’s CPI,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “Overall it was a bit more balanced and there’s a rally on the back of that. The market doesn’t really get any more in terms of how much conviction to place on the timing of the next hike on the back of these minutes.”