Steady as she goes, Governor Carney.

Photographer: Jason Alden/Bloomberg

Higher Rates Would Sink U.K.

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Two members of the Bank of England's nine-person Monetary Policy Committee have voted for rate increases at recent meetings, warning about the prospect of an inflationary jump in salaries. While wage growth is now outpacing inflation for the first time since 2009, the central bank's own forecasts for consumer prices mean monetary policy should stay frozen.

Basic wages, excluding bonuses, grew by 1.3 percent in September, the fastest pace in six months and surpassing the 1.2 percent gain in consumer prices. Real wages -- what workers are left with after inflation takes a bite -- have been shrinking for five years:

So real wage growth is currently 0.1 percent -- hardly the stuff of central bank nightmares. Moreover, the outlook for the U.K. economy is worsening as its European neighbors threaten to slide back into recession.

The U.K. central bank has slimmed its growth forecasts. The economy will expand by 2.9 percent next year, not 3.1 percent. And the bleak outlook for growth in the euro zone means a 1 percentage point drop in U.K. exports this year compared with the bank's previous forecast for a 2.25 percent increase.

The Bank of England now says inflation will slide below 1 percent in the coming months, and won't meet its 2 percent target for three more years. Its 2014 inflation forecast is now 1.2 percent, down from a 1.9 percent August projection. It says prices won't accelerate much next year either, at 1.4 percent. As a result, the interest-rate futures market expects monetary policy to tighten in November 2015, a month later than it projected yesterday.

All of this should mean the two policy makers who've called for higher borrowing costs -- Martin Weale and Ian McCafferty -- should be revising their opinions. Last month, McCafferty told the Sunday Times that "starting to raise bank rate now makes it more likely that the increase required over coming years to deliver our inflation target can be kept gradual and limited.” The recovery, though, is still too fragile for pre-emptive moves on rates to make any sense.

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