Financial News

  • 14 August 2014, 10:58

Bank Gives Latest Signal On Rate Rise Timing

The governor of the Bank of England has said that weak wage growth will be more closely watched in relation to the timing of interest rate rises.

At a news conference to outline the Bank's quarterly Inflation Report, Mark Carney insisted that rises in bank rate - when they began - would be limited and gradual and he believed the financial markets broadly shared that timetable.

Economists and markets are expecting the first increase - from its historic low of 0.5% - either late this year or in early 2015.

A key factor in the decision-making timetable will be the public's ability to absorb interest rate rises, given current weak wage growth. 

Just an hour after it was confirmed that pay including bonuses slipped 0.2% in the second quarter compared to a year ago, the Bank announced it had slashed its forecast for wage growth in 2014 from 2.5% to a below-inflation 1.25%.

The Report signalled that the Monetary Policy Committee (MPC), which sets bank rate, would place an increasing emphasis on the weak pay data in deciding when to raise interest rates.

Mr Carney refused to go further, insisting there would not be a "magic number" for wage growth that would prompt a hike.

The Bank's predictions for the wider economy were better, with UK growth figures upgraded from 3.4% to 3.5% for 2014 and unemployment was expected to drop more quickly, falling below a rate of 6% this year.

One factor supporting those who would argue for an earlier rate rise was a quicker-than-expected narrowing in the key measure of wasteful spare capacity - or slack - in the economy.

Mr Carney said it had fallen to around 1% of GDP, despite the fall in real wages, due to strong employment numbers.

He told reporters: "In light of the heightened uncertainty about the current degree of slack, the committee will be placing particular importance on the prospective paths for wages and unit labour costs."

Sterling fell more than 1.5% against the dollar in the wake of the governor's comments.

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