Bank of England Governor Mark Carney’s policy committee is moving closer to its first rupture this year as the labor market continues to strengthen.
An acceleration in wage growth has seen two Monetary Policy Committee members say that interest-rate increases will need to start soon. Data on Wednesday showing earnings are rising the fastest in six years and progress in Greece’s talks with its creditors may give them a further nudge.
The data will come a day after Carney is grilled by lawmakers on the U.K. Parliament’s Treasury Committee about the economic outlook and financial stability. While inflation remains far below the BOE’s 2 percent target, the nine-member MPC’s central view is that it will accelerate and the next move in rates from a record low will be an increase. For Martin Weale and Ian McCafferty, that push for tightening may start soon.
The labor data “will encourage them and for the next couple of months we are going to see wage inflation picking up,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “The big difference is that they just view labor market conditions as being a bit tighter.”
Earnings rose an annual 3 percent in the three months through May, compared with 2.7 percent, economists forecast in a Bloomberg survey. Including bonuses, wages increased 3.3 percent. Unemployment probably stayed at its lowest since 2008.
McCafferty says there’s a risk that average earnings will “accelerate markedly” from next year. Weale has talked about a “fizzing” labor market.
For those not inclined to tighten yet, there are risks related to Greece’s crisis as well as weak U.K. inflation, with data Tuesday forecast to show prices stagnated in June. That doesn’t mean deflation concerns should resurface, with Investec Securities pointing to a drag from clothing prices due to the timing of discounting.
BOE Chief Economist Andy Haldane is pushing against the Weale-McCafferty view, saying wages aren’t on a “rocket-propelled ascent” and the pound’s advance will weigh on inflation. Sterling rose 0.4 percent against the dollar $1.5576 as of 11:36 a.m. London time. It surged 1.1 percent versus the euro.
Economists forecast the key rate will be increased from 0.5 percent in the first quarter, while investors are only fully pricing in a 25 basis-point move by the middle of 2016.
A split on the committee could happen as early as next month, when officials will have new forecasts. Carney and his colleagues will also assess Chancellor of the Exchequer George Osborne’s latest fiscal plans. For Michael Saunders, an economist at Citigroup Inc. in London, the July 8 budget changes to tax credits and introduction of a living wage “may well lift pay growth, especially at the bottom end of the pay scale.”
But external threats remain, including the Greek crisis and its potential to undermine growth in the euro area, Britain’s biggest trading partner. A solution could help the recovery in the currency zone build momentum.
At the latest round of talks between Greece’s government and its creditors, the sides agreed on a way to move forward and release aid for the country. Under the deal, the Greek Parliament has until Wednesday to pass fiscal measures Prime Minister Alexis Tsipras agreed to with creditors.
“Britain can give a cautious welcome that the euro zone have stepped back from the brink,” Chancellor of the Exchequer George Osborne said on ITV. “It’s pretty clear that these problems in Greece and across Europe have an impact on our economy.”