BOE Rate Debate Sharpens as Labor Tightens Yet Wages Stay Feeble

  • Data shows faster inflation and unemployment at a 42-year low
  • U.K. central bank is meeting for rate decision on Thursday

Blanchflower Says a BOE Rate Raise 'Clearly Wrong'

The most recent economic figures from the U.K. provided something for everyone on the Bank of England’s Monetary Policy Committee.

For those in favor of keeping rates on hold, tepid wage growth that’s lagging behind inflation is a sign consumers are struggling. For the hawks, however, the continued fall in unemployment and even faster price growth argue for getting ahead of the curve.

That sets the scene for a familiar debate between policy makers led by Governor Mark Carney as they mull when to start removing their extraordinary stimulus measures, which were expanded in the wake of last year’s Brexit vote. Investors, who stepped up expectations for future rate increases after Tuesday’s inflation figures, pared those bets slightly after Wednesday’s jobs report.

While that may not augur for a dramatic shift in the MPC’s vote at Thursday’s meeting, the picture may be altering, albeit slowly. Since they last voted in August, wage growth has picked up to 2.1 percent from 1.9 percent while inflation is running ahead of their forecasts that month, having accelerated to 2.9 percent from 2.6 percent.

“For some members, above-target inflation, and further erosion of labor market slack, will result in their individual policy conclusion being different,” said RBC economist Sam Hill. “So, whilst we maintain a central case expectation for a 7-2 vote at tomorrow’s MPC decision, the risk is that it could be a 6-3 split.”

Most economists expect Michael Saunders and Ian McCafferty to maintain their votes for a rate increase, with the remaining seven members expected to opt for no change. Chief Economist Andy Haldane, usually on the dovish end of the panel, is seen as the most likely to join the hawks, after he said in June that “withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year.”

“U.K. markets are watching tomorrow’s MPC announcement with interest -- this is not so much because they fear an immediate increase in interest rates, but to see from the minutes whether the committee as a whole is any closer to a tightening,” said Philip Shaw, an economist at Investec in London.

For some policy makers, the precarious outlook for consumers will suggest it’s still too early to move.

“Despite the ongoing strength in labor market activity, weak wages combined with higher inflation this week make for an even worse predicament for households,” said Nomura economist George Buckley. “This looks likely to be sufficient to allay any concerns about a rate rise tomorrow. November is a different matter.”

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