LONDON
British pay growth has lagged behind inflation again, official data showed on Wednesday, but the figures are likely to cement expectations among investors that the Bank of England will soon raise interest rates for the first time in a decade.
The data also showed the unemployment rate between June and August held at its 42-year low of 4.3 per cent, one of the reasons why the BoE thinks pay is likely to pick up soon.
Despite a slowdown in Britain’s economy this year, the central bank is widely expected to increase rates to 0.50 per cent from an all-time low of 0.25 per cent on Nov. 2, at the end of its next meeting.
Sterling rose briefly after the figures from the Office for National Statistics and government bond prices fell slightly.
“I can’t see anything in these numbers that will alter the Bank of England’s thinking,” Sam Hill, an economist with RBC Capital Markets, said.
But the disparity between weak wage growth and high inflation — which hit 3 per cent in September, its highest level in more than five years — meant there was “considerable doubt” about the chance of further rate hikes in 2018, he said. The BoE expects pay growth to pick up speed soon because the unemployment rate is below the 4.5 per cent level it sees as a trigger for inflation pressure in the economy. It also thinks Brexit will increase price growth in Britain.
However, comments by two BoE policymakers on Tuesday, who noted the weak growth in wages, were seen by investors as a sign that further rate hikes by the central bank might be further off than previously thought.
The Office for National Statistics said workers’ total earnings, including bonuses, rose by an annual 2.2 per cent in the three months to August and it slightly revised up growth in the three months to July to 2.2 per cent as well.
Economists taking part in a Reuters poll had expected wage growth of 2.1 per cent.
Excluding bonuses, earnings rose by 2.1 per cent, a touch stronger than the Reuters poll forecast of 2.0 per cent.
In August alone, total wages picked up speed to grow by 2.2 per cent after a slowdown in July to 1.7 per cent.
The Bank of England’s latest forecasts show it expects wages to rise by 2 per cent this year before picking up to 3 per cent in 2018 and 3.25 per cent in 2019.
The steady loss of spending power for households is not just a headache for the BoE. Prime Minister Theresa May has promised help for households and has proposed a cap on power tariffs.
Finance minister Philip Hammond is under pressure to come up with further measures when he announces his budget plan in November. But he has little margin for error given the still weak state of Britain’s public finances.
The number of people in work rose by 94,000 in the three months to August, about half the increase in the three months to July but still a relatively strong rate of growth.
The employment rate stood at 75.1 per cent, falling slightly from the previous reading but still higher than in most other rich economies, the ONS said.
