Weaker than expected wage growth is the principle reason behind a more dovish position on rates than a couple of months ago commentators and analysts agree, and it suggests the timeframe for a first interest rate hike since the recession could be slipping back.
The Office for National Statistics reported that wages including bonuses fell by 0.2% in the year to June, despite strong GDP growth. With bonuses excluded growth was a still meagre 0.6%, a number Carney described as ‘remarkably’ weak.
“The general gist of the inflation report is that the Bank of England feels a little more confident about the outlook for economic growth but a lot less comfortable with the weakness in wage growth,” said Abi Oladimeji, head of investment strategy at Thomas Miller Investment. “Clearly, weak wage growth has a dampening effect on inflation so viewed from this perspective Carney’s relatively dovish tone is understandable,” he added.
“Arguably, the persistent weakness in wage growth alongside a sharp decline in the unemployment rate suggests that the medium to longer term equilibrium level of unemployment may be lower than widely thought,” Oladimeji continued. “This is essentially what the Bank now thinks and this argument would support the MPC’s view that the unemployment rate can move a lot lower without generating significant inflationary pressure,” he said.
Nicholas Gartside, manager of the JPM Strategic Bond fund, said wage inflation has long been the ‘desert island indicator’ or in other words the single critical indicator to watch. “An acceleration of consumer spending is one of the keys to a sustainable, broad based and enduring economic recovery,” he said.
With UK bonds already discounting low inflation and gradual rate rises with ten-year gilts trading around 2.5% Gartside said other bonds such as US high yield and European bonds, high yield, corporate and Eurozone periphery arguably offer more value now.
F&C Investments’ chief economist Steven Bell said a pressing goal for Carney was to quash the growing sense that he personally is a source of instability following Treasury Select Committee member Pat McFadden comparing him to ‘an unreliable boyfriend’ last month.
“In response, Carney used today’s press conference to present a picture of reliability, he used the phrase ‘dull and boring’ over and over again, noted Bell.
CBI Director-General John Cridland is concerned by the latest ONS wage numbers. “The recovery is progressing along the right path and there are signs of growth becoming increasingly broad-based, with business investment picking up disappointing wage growth remains a concern for households, and will have implications for the MPC when considering the stance of monetary policy,” he said.
