Bank of England Inflation Anxiety Mounts With Oil Below $40

  • Wage growth forecast to slow to least since first quarter
  • BOE's Shafik says faster wage growth needed for rate increase

Stuck in the Middle: BOE Caught Between Fed and ECB

The Bank of England’s inflation worries may already be coming to fruition. 

Brent futures dropped to a seven-year low on Friday, a day after Mark Carney and the Monetary Policy Committee said low oil prices and subdued wage gains are increasing the risk that price growth will take longer to pickup than they currently anticipate. Data this week will shed more light on the outlook, with the statistics office due to publish reports on consumer prices and pay.

While the Federal Reserve is heading for the first increase in its key rate since 2006, the BOE’s inflation anxiety indicates it remains some distance from such a move. In its December policy statement -- when the MPC held the benchmark at a record-low 0.5 percent -- it warned low headline price growth may be feeding through to pay settlements.

BOE Deputy Governor for Markets and Banking Minouche Shafik said on Monday that wage pressures aren’t yet strong enough to justify a rate increase and that she will “proceed with caution” on the timing. She also said that if downside risks don’t materialize, rates could rise faster than investors have currently priced in, and that the next move is likely to be up.

“I will wait until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target before voting for an increase,” Shafik said in a speech in London. “I judge it prudent to tread carefully.”

No Hurry

On Tuesday, U.K. data is forecast to show that the inflation rate was just 0.1 percent in November, far below the bank’s 2 percent target. The statistics office may say on Wednesday that basic earnings growth cooled to 2.3 percent in the three months through October from 2.5 percent a month earlier. That would mark the weakest reading since the first quarter. The report may also show the unemployment rate held at 5.3 percent, matching September’s reading which was the lowest in more than seven years.

“We’re looking for whether the flattening in wage growth is turning in to a slowdown,”’ said Chris Hare, an economist at Investec and a former BOE official. “The weakness in near-term inflation and the questions the MPC raised on wages shows they aren’t in any hurry to raise rates.”

The question of why prices remain subdued even as the labor market tightens and the economy expands formed the backdrop for the BOE’s commentary last week, and was the reason eight of the nine policy makers didn’t want to tighten policy. The central bank noted that while there may be temporary volatility in the wage data, “it could also be that lower headline readings of inflation have acted to limit recent nominal pay growth, despite the tightening labor market.”

Brent for January settlement dropped as much as 66 cents, or 1.7 percent, to $37.27 a barrel on the London-based ICE Futures Europe exchange. It slid $1.80 to $37.93 on Friday, the lowest close since December 2008.

U.S. officials are also balancing a strong labor market against feeble inflation. Fed policy makers meet Dec. 15 and 16 to consider the first increase the federal funds rate since June 2006. Almost all of the 98 economists in a Bloomberg News survey predict a quarter-point increase, ending a seven-year era of near-zero rates.

“The MPC is still under no pressure to follow the U.S. Fed,” said Paul Hollingsworth, an economist at Capital Economics in London. While inflation is set to accelerate in the coming months, it “should still take a very long time to return to the 2 percent target,” he said.

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