BOE's Forbes Says Wage Growth Doesn't Yet Justify a Rate Hike

Bank of England policy maker Kristin Forbes said she wants to see stronger wage and labor-cost growth in the U.K. before the central bank raises interest rates from a record low.

Current wage and labor-cost data aren’t consistent with inflation accelerating to the BOE’s 2 percent inflation target, Forbes said in prepared remarks for a speech to be delivered on Tuesday in London. While she expects these to pick up, she has some doubts about forecasting models and wants to wait to “verify” before acting.

“I would like to see a bit more upward movement in these wage and cost measures to build confidence that the normal chain of tight labor markets feeding through into higher wages is still intact,” she said in the speech, published on Monday. “The most recent falls in oil prices, by delaying the recovery in inflation, provide the luxury of a bit more time to build this confidence.”

While U.K. unemployment is at its lowest level in almost 10 years and the employment rate is at a record, that hasn’t yet been reflected in a sustainable pick-up in wages. Underlying pay growth slowed to 1.9 percent in the three months through November, and inflation was 0.2 percent in December. Policy makers only expect a slow pickup in price growth through 2016.

In the speech, which analyzed the U.K. and U.S. labor markets, Forbes said that both have very little slack remaining. She also said that some of the weakness in wages may reflect temporary factors and that momentum in pay and unit labor costs should accelerate.

“Both economies have also been experiencing slower headline wage growth than would be expected given the tightness of their labor markets,” she said.

Forbes said while the U.K. and U.S. shared similarities in economic and job developments, there are differences and it’s not necessarily correct that both countries will have a similar monetary policy stance. The Federal Reserve last month raised interest rates for the first time in almost a decade.

“Once this upward momentum in wages and unit costs builds -- as I expect it will -- then it will be time” for the U.K. to “begin the slow and gradual process of tightening monetary policy,” she said.

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