Wages Going Sideways Buy Time for Carney on Rates

U.K. wages, which Bank of England policy makers identify as the key barometer in the debate over borrowing costs, are going nowhere.

Pay excluding bonuses rose just 0.7 percent in the three months through May from a year earlier, the least since records began in 2001, government data published yesterday showed. As recently as May, the BOE expected earnings growth to approach 2.5 percent by the fourth quarter.

For the Monetary Policy Committee, the figures could indicate there is enough slack in the labor market to keep the benchmark rate at a record-low 0.5 percent until 2015 even as the recovery strengthens, say economists including Sam Hill at RBC Capital Markets. With inflation accelerating to 1.9 percent in June, real wages for many Britons are continuing to decline.

“The recovery in wages still has a long way to go, and it will be quite a stretch to get to 2.5 percent by the end of this year,” London-based Hill said in an interview. “It would be a bit incongruous for the BOE to start to talk up early rate-rise expectations with this aspect of the labor market appearing more fragile than they were anticipating in May. They’ll tread cautiously with this data.”

Sonia forwards are pricing in a quarter-point rate increase by February. The implied yield on short-sterling contracts expiring in December, which jumped July 15 on news of a stronger-than-expected pickup in inflation, fell 1 basis point to 0.83 percent today following a 3 basis-point decline yesterday.

Tipping Point

Pay took center stage in the debate over when to tighten policy after a faster-than-expected drop in unemployment forced BOE Governor Mark Carney to modify his forward guidance. The jobless rate fell to a 5 1/2 year low of 6.5 percent in the quarter through May compared with a peak of 8.4 percent in late 2011. Carney initially set 7 percent as the threshold for considering the first rate increase since 2007.

Carney said last month a revival of real wages is needed to keep household spending growing. Even Martin Weale, predicted by economists to be the first MPC member to call for higher rates, said in June that continued weak wage growth could “tip the scales” further in favor of maintaining emergency stimulus.

“Should the wage data remain muted going forward, this presents a risk to our view of the first rate hike by the end of the year,” said George Buckley, an economist at Deutsche Bank AG in London. Pay reports “will be important in providing the bank with information about the degree to which unobservable spare capacity exists.”

Bonus Shift

Gilt yields have risen in anticipation of higher borrowing costs. The two-year rate jumped almost five basis points, the most in more than two months, to 0.87 percent after the inflation data two days ago. It was down 3 basis points at 0.84 percent at 2:22 p.m. in London today.

Including bonuses, average earnings rose 0.3 percent in the latest three months, the weakest figure since 2009. While the growth rate was subdued by companies shifting bonus payments into April last year to take advantage of a cut in the top income-tax rate, there was little sign of underlying pay pressure. In May alone, earnings were 0.4 percent higher than a year earlier, with private-sector pay up 0.6 percent and government workers seeing no increase.

Prime Minister David Cameron, who is seeking re-election in 10 months, said yesterday the lack of pay growth was “disappointing” as he was challenged by the opposition Labour Party over what it calls the “cost of living crisis” hurting most voters.

Bargaining Power

Part of the explanation is that workers still have little bargaining power over wages, say economists. Of the 8.05 million people working part-time between March and May, 1.36 million were doing so because they could not find a full-time job, yesterday’s figures showed. Self-employment climbed to a record and temporary jobs were at levels last seen 13 years ago.

British workers accepted wage cuts and freezes as the price of keeping their jobs during the financial crisis, and government estimates this month showed median real household income in 2012-13 was still about 6 percent below its peak three years earlier.

As productivity improves and declining unemployment creates shortages, wages may pick up, economists say. More than two thirds of companies plan to increase staff pay at least in line with inflation over the next 12 months, according to a survey by the Institute of Directors published today.

Until that materializes, policy makers may be able to keep rates where they are.

“Wage growth remains weak, but that will not last much longer if unemployment keeps dropping this fast,” said Rob Wood, an economist at Berenberg Bank in London and a former BOE official. “The BOE will not hike if pay gains remain this feeble, but we look for wages to improve and see a 60 percent chance that the rate setters will hike in November.”

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