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Comment: Slow pay growth could delay rate rise

Martin Flanagan

Martin Flanagan

  • by MARTIN FLANAGAN
 

A NOTABLE factor in Britain’s economic recovery has been that while unemployment has fallen rapidly, wage growth has been muted. Latest figures show wage rises running at 0.3 per cent, a fall in real terms when inflation is at 1.9 per cent.

The clear inference is that people are prepared to work for less in order to be back on the employment carousel, witness zero hours contracts etc.

It is also a logical development of the prolonged wage freeze in much of the private sector that millions of employees accepted in return for having a job in the downturn from 2008 to 2011.

But it looks as if that slow wage growth could now affect wider society as the Bank of England (BoE) seems to be signalling that the timing of any rise in interest rates will be influenced by that data.

At current levels, pay growth is not a contributor to inflationary pressures, and so would be a factor in slowing any monetary tightening.

Mark Carney, governor of the Bank of England, said in a speech ahead of the Commonwealth Games in Glasgow yesterday that the central bank would update its thinking in next month’s inflation report on how to take into account the prospects for pay in its deliberations.

Carney is sensitive to accusations that the BoE’s rate guidance has led to confusion about when rates will go up, leading one politician on the Treasury select committee to compare him recently to an “unreliable boyfriend”.

But, to be fair to the governor, the only real U-turn on guidance was when the Bank dispensed with the reference point of a set unemployment rate as a threshold for considering whether rates should rise because this fell much more quickly than expected.

Since this was replaced by a more flexible touchstone of the amount of “slack” in the economy, taking into account multiple data, wage growth has consistently been an important consideration in the sights of the BoE’s monetary policy committee (MPC).

Even so, it is interesting that Carney’s speech and the just-released minutes of the last meeting of the MPC both focus so publicly on the issue.

Reading the runes of BoE policymaking can often feel vaguely theological, full of delphic nuances. But, without accusing Carney and co unfairly of a further flip-flop, it is fair to say wage growth has moved much more into the spotlight as far as interest rate rise timing is concerned than before.

Minnow bank plays a champion’s role

CHAMPIONS of challenger banks, and small businesses in particular, will be cheered that Metro Bank had more than trebled its lending at the end of its second trading quarter compared with a year earlier. And more than half of that is to SMEs.

People tend to focus on the bigger challenger banks, typified by the likes of TSB etc, but we should not forget minnow challengers can also affect the market.

 

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