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UK Wages Rise Faster Than Inflation, But Bank of England to Keep Rates Low

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Good news – the UK economy is still creating jobs and there are now more people in work than ever before. Even better news, real incomes are now rising as Wednesday’s wage data showed the rate of average earnings for September was 1.3% which is higher than the current rate of UK inflation at 1.2%. If you thought things couldn’t get any better, the Bank of England (BOE) also reduced their inflation forecasts expecting price rises to drop to below 1% within the next six months. If wage inflation can sustain these levels then real incomes look set to keep rising well into next year and ahead of any rate rise from the BOE.

Governor Mark Carney has shifted the focus away from the rate of unemployment and onto wage inflation. Even though Mr Carney says average earnings are not a trigger for rate rises, he and many of the Members of the BOE’s Monetary Policy Committee (MPC) have made it clear that future interest rate rises will not be solely determined by the rate of inflation, but by wage growth and Wednesday’s data is likely to be seen as evidence that this is now gaining traction.

This however will not be enough to sway a very sceptical and dovish MPC that in recent weeks has seen a number of its members voice their concern about the UK economy’s ability to sustain its momentum, especially as external factors are now an increasing threat (yes the good old Eurozone again being just one of them) and recent business and confidence surveys have fallen back.

In Wednesday’s BOE Inflation Report Mark Carney said that there were only tentative signs that wage growth was rising, so these are hardly the words from a Governor that’s about to raise the UK interest rate benchmark from its historical low of 0.5%. After the good average earnings data was released UK two year gilt yields spiked (indicating an increase in interest rate rise expectations), but this was very quickly reversed as the BOE Inflation Report was revealed. GBPUSD also dived back below 1.5900 having been marking new intraday highs around 1.5940, so there’s very little to suggest rates will be seeing the first rate hike in the early stages of 2015 and indeed current market expectations are pencilling in next summer.

The problem with this however is that if rates remain below or around 1% for the next few years, the “new normal” in interest rates as many are referring to it, then leaves very little wiggle room for the BOE in future when the next downturn comes. Who knows when that will be but I’m afraid market cycles do occur and this recent spurt of growth will eventually end and the “independent” BOE will be called upon once again to use its monetary powers to kick start the economy.

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