U.K. Wages Going Wrong Way Keep Carney's Rate Stance Intact

  • Average-earnings growth slows to 2.3%, least in five months
  • Households being squeezed by rising prices as pound tumbles

BOE May Make Smaller Adjustments, Says RBC's Lignos

One of Mark Carney’s key reasons for keeping U.K. interest rates at a record low is holding up for now.

Average earnings rose at the weakest pace in five months in January, with the rate of growth dropping to 2.3 percent. The slowdown, sharper than economists had forecast, came even as unemployment declined to 4.7 percent, as low as at any time in the last four decades. The pound pared its advance against the dollar after the data were published.

As the Bank of England governor and his fellow policy makers prepare to announce their latest interest-rate decision on Thursday, the data will reassure the doves that they are right to hold their course for now. While some members of the Monetary Policy Committee have started to get jittery about an inflation pickup after the pound’s drop, the majority see a greater level of slack in the labor market, which will keep underlying price pressures in check.

“Although inflation is gathering momentum, wage growth is showing few signs of advancing,” said Dan Hanson, an economist at Bloomberg Intelligence in London. “Given there are few upside risks to the outlook for domestically generated inflation, the Bank of England is unlikely to see a case for tightening.”

Traders see almost no possibility of the BOE changing interest rates at tomorrow’s decision. They give less than a 20 percent chance to an increase by the end of the year, down from 24 percent on Tuesday, according to data compiled by Bloomberg News.

In addition to modest wage growth, the MPC’s other key judgments in their February assessment were that weaker sterling continues to boost inflation and the ensuing squeeze on incomes puts the brakes on household spending. The pound has fallen 1.6 percent this month and is down 18 percent since the Brexit vote in June. Recent retail-industry data suggest Carney’s outlook for consumer behavior is also on the money.

The drop in the headline unemployment rate came as employment rose by 92,000 in the three months through January to a record 31.9 million. That was largely due to a jump in self-employment, with the number of employees rising just 17,000. That’s less than a fifth of the average increase over the past five years. More than 900,000 workers are now employed on a “zero-hours” basis in their main job, not knowing how many hours of work they will get from week to week.

The BOE now estimates that the equilibrium jobless rate -- the level needed to really generate inflationary pressure -- is about 4.5 percent. It expects unemployment to edge up this year to about 5 percent, while economists surveyed by Bloomberg see it reaching 5.2 percent. That’s not a large move, but it does keep the rate well above the level the BOE is watching.

“All told, the combination of meager wage growth despite very low unemployment supports the MPC’s view that enough slack remains in the labor market to warrant keeping rates on hold during the imminent period of high inflation,” said Samuel Tombs, chief U.K. economist at Pantheon in London. He also said the report hints that the equilibrium unemployment rate could even be lower than the MPC estimates.

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