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Rise of the Robots May Hold Back Interest Rates

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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The U.S. Federal Reserve still seems to be set to raise borrowing costs later this year, probably in September. The Bank of England is trying to convince investors that it, too, is poised to push up interest rates. I'm still worried both may be seduced into acting before their economies justify a move. They may be propelled instead by psychology: Leaving rates near zero makes central bankers uncomfortable.

QuickTake The Fed's Countdown

As economists at Royal Bank of Scotland pointed out today, 15 members of the Organization for Economic Cooperation and Development have raised interest rates since 2008; every single one has since reversed those moves. "Raising rates is hard to do," the economists argue:

Source: RBS

Looking at the history of U.S. and U.K. central bank rates in recent years, it's easy to see why trigger fingers are getting itchy. Year after year of leaving borrowing costs at what economists call "the zero lower bound" makes policy makers nervous that they'll be accused of being asleep at the wheel if inflation starts to accelerate:

"There is a high bar right now to not acting," Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, told the Wall Street Journal in an interview published on Tuesday, adding that it would take a "significant deterioration" in economic data to stop him from supporting a September rate increase. Bank of England Governor Mark Carney said on Thursday that the economic outlook is "consistent" with tighter monetary policy.

One key economic measure that's restrained both the Fed and the Bank of England from pushing the rate-rise button is the lack of wage growth in both countries. Central bankers are hoping that an earnings turnaround will free them from their current shackles. The U.K. has enjoyed eight months of incomes exceeding inflation, although wages shrank on an inflation-adjusted basis almost every month between the middle of 2008 and the start of the fourth quarter of last year, so there's a ton of ground to make up. U.S. wage growth, meantime, has been stuck at an average of 2 percent for the past five years:

While wages clearly aren't the only determinant of the inflation outlook and the prospects for growth, they are one of the most basic ways that the average consumer feels what's happening in the economy. And maybe the puzzlement central bankers have expressed at the paucity of income increases isn't so puzzling after all. Maybe -- just maybe -- the much-worried-about rise of the machines is already having a background effect in the labor market.

The number of robots working in factories around the world is expected to reach almost 2 million by 2017, an increase of almost 70 percent since 2011, according to economic data compiler Statista. Worldwide sales of industrial robots have almost doubled in the past five years, and surged by 26 percent last year to reach a record 225,000:

Source: Statista

It seems intuitive that the more robots in businesses and factories, the less need to raise wages. And while the service industries and the much-vaunted knowledge economy aren't so easy to mechanize, that may change as machines get smarter and artificial intelligence lives up to its promise. The rise of the robots might be a reason not to raise interest rates. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Paula Dwyer at pdwyer11@bloomberg.net