Photographer: Paul Thomas/Bloomberg

Weak Wage Puzzle May See Bank of England Hold Off on Rate Rise

  • BOE announces next decision, publishes new forecasts on Aug. 3
  • Carney, Haldane say wage growth developments key to policy

The weak wage puzzle haunting the Bank of England could restrain policy makers from raising interest rates next month.

While unemployment dropped to the lowest in 42 years, overall earnings rose just 1.8 percent, and they fell the most since August 2014 when adjusted for inflation. That gives weight to BOE officials arguing that accelerating price gains are a temporary phenomenon driven by the pound’s drop since the Brexit vote last year.

“We still think it is more likely than not that the MPC will hold off for a while longer, rather than raise interest rates imminently,” said Paul Hollingsworth, an economist at Capital Economics.

The central bank announces its next policy decision and publishes new forecasts on Aug. 3. Three of eight policy makers voted last month for a rate increase, arguing that some withdrawal in the stimulus introduced after last year’s referendum to leave the European Union is now necessary with inflation above the bank’s 2 percent target.

Others including chief economist Andy Haldane and Governor Mark Carney have since said that some normalization might soon be necessary, but that hinges crucially on the outlook for investment and wages.

Deputy Governor Ben Broadbent said before the data were released that “there are still a lot of imponderables,” and that he’s not yet ready to vote for higher rates, though he sees pressures building to do so. 

His comments make it “very unlikely that they’ll be enough momentum in that direction for a rate rise to be a realistic option” in August, according to Philip Shaw, an economist at Investec.

Unemployment is now at 4.5 percent, the lowest rate in four decades and the level which BOE policy makers say should fan wage growth and inflation. Officials have offered a wide range of reasons as to why pay growth is so sluggish: Haldane said last month that flexible hours, self-employment and zero-hours contracts could all have a damping effect.

Former policy maker Kristin Forbes said that Britons are less likely to get pay rises since they’re switching jobs less frequently, possibly as a reflection of a loss of confidence since the Brexit vote. She also said that if the bank waited until wages growth started picking up to increase interest rates, it would be too late.

The problem of a tight labor market with weak wage growth isn’t unique to Britain. European Central Bank and Federal Reserve policy makers have also been debating why pay has remained relatively soft.

— With assistance by Emma Charlton, Andrew Atkinson, Lucy Meakin, and Scott Hamilton

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