A SURPRISE stall in wage rises and minutes showing Bank of England caution over low inflation combined to cool expectations of a 2015 interest rate hike yesterday.
Official figures showed total annual pay growth in the three months to January at 1.8 per cent, well short of expectations though still some way above inflation.
Wage growth was lower than the previous month’s figure of 2.1 per cent, the first slowdown since June.
Meanwhile, minutes for the March meeting of the monetary policy committee (MPC) showed members remained unanimous on the need to hold rates at their record low of 0.5 per cent, where they have been for six years.
Unprecedentedly low inflation has already caused the two most hawkish members to drop their calls for a rate rise, and now the bank is worried that stimulus measures in the eurozone will keep prices lower for longer.
Since the European Central Bank announced its bond buying programme earlier this year, the pound has risen to a seven-year high against the single currency.
The minutes stated: “Intelligence gained from market contacts suggested that upward pressure on sterling might have been stronger still had it not been for the effect of uncertainty surrounding the forthcoming general election.”
Rate-setters must target a 2 per cent level of CPI inflation but it has recently fallen to an all-time low of 0.3 per cent and is expected to turn negative before remaining close to zero for much of this year.
The MPC said the recent strength of the pound against the euro had “the potential to prolong the period for which inflation would remain below the target”. The news comes after a recent speech in which bank governor Mark Carney warned of the risks of prolonged low inflation, which he said could pose a “clear and present danger” to the UK’s debt-laden households and businesses.
The minutes showed that the bank’s latest decision was based on wages growing “slightly ahead of forecast”, before figures showed rises had stalled.
They also revealed that despite the “solid pace” of the recovery, policy makers had been given “pause for thought” by the components of growth. Figures last month showed it had been buoyed by consumer spending while business investment plunged.
Jeremy Cook, chief economist at international payments company World First, said: “At the end of the day the Bank of England is an inflation targeting entity and with very low inflation as a result of oil and food price falls and a strong pound – up around 3 per cent on the year – the emphasis is to hold off on rate rises for longer.”
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