Mark Carney, and his fellow members on the central bank’s monetary policy committee (MPC), are under intense scrutiny by markets, politicians and the wider general public over the direction of their economic policy.
With the UK recovery seemingly on an even keel and inflation largely under control a hike in interest rates had been looking like a sure bet, possibly as early as this autumn. Indeed, many of us are still pencilling in higher borrowing costs, with Friday’s BoE’s inflation attitudes survey suggesting that nearly half of Britons expect a rise to take place over the next 12 months – the highest proportion in more than three years.
The stumbling block for Carney and Co is the almost total lack of wage growth, something that is placing a serious squeeze on family budgets faced with soaring energy bills and shop prices that are still outpacing any increase in take-home pay.
The UK is not alone in facing this wage/inflation dilemma. A stark report last week published by the OECD think-tank revealed that real wage growth in the developed world had come to a “virtual standstill” since 2009 and has fallen in a number of countries. It noted that unemployment would remain well above pre-crisis levels next year in most countries.
In the UK, employment has been increasing for the past two years, while unemployment has been falling. The latest figures indicate that more than 30 million people are in work, 820,000 more than a year ago, while the jobless total has dipped to just over two million, a rate of 6.4 per cent, the lowest since late 2008.
With the retail and leisure sectors buoyant, many of these workers will be stuck in low-paid, frequently part-time, jobs. Research by the Centre for Cities and the Joseph Rowntree Foundation has more than one in five workers classified as being on low pay. It sees the gap between good and poor quality jobs polarising, threatening the stability of the economy. TUC boss Frances O’Grady is sure to use this week’s annual congress to highlight these issues and urge the government to widen the BoE’s remit to factor in unemployment before embarking on a rate hike.
The jobless rate and wage growth are already weighed up by rate-setters, but as a secondary consideration to inflation and mainly to judge when increased wages will feed into higher prices.
O’Grady has been arguing for a move to a dual remit along the lines of the US Federal Reserve, which places equal emphasis on forecasts for unemployment and inflation when setting rates. Her proposal has merit and the Treasury and Threadneedle Street would do well to take notice.
Recent industrial unrest in Britain has been sporadic – London Tube drivers, some pockets of the civil service. A repeat of 1978-9’s bitter Winter of Discontent is unlikely, though further hefty cuts within the public sector could spark trouble. The private sector’s capacity to absorb displaced workers and create new jobs has a limit.
Given the current backdrop, and despite some increasingly hawkish voices on the MPC, a rise in interest rates this side of next year’s General Election will be a hard sell.
Carney’s TUC address may be his toughest test yet.