U.K. pay keeps BOE leery of rate hike

WEAK GROWTH

FERGAL O’BRIEN L O N D O N • One of Mark Carney’s key reasons for keeping U.K. interest rates at a record low is holding up for now.

Average earnings rose at the weakest pace in five months in January, with the rate of growth dropping to 2.3 per cent. The slowdown, sharper than economists had forecast, came even as unemployment declined to 4.7 per cent, as low as at any time in the last four decades. The pound pared its advance against the dollar after the data were published.

As the Bank of England governor and his fellow policy-makers prepare to announce their latest interestrate decision on Thursday, the data will reassure the doves that they are right to hold their course for now. While some members of the Monetary Policy Committee have started to get jittery about an inflation pickup, the majority see a greater level of slack in the labour market, which will keep price pressures in check.

“Although inflation is gathering momentum, wage growth is showing few signs of advancing,” said Dan Hanson, an economist at Bloomberg Intelligence in London. “Given there are few upside risks to the outlook for domestically generated inflation, the Bank of England is unlikely to see a case for tightening.”

Traders see almost no possibility of the BOE changing interest rates at tomorrow’s decision. They give less than a 20-per-cent chance to an increase by the end of the year, down from 24 per cent on Tuesday, according to data by Bloomberg News.

In addition to modest wage growth, the MPC’s other key judgments in their February assessment were that weaker sterling continues to boost inflation and the ensuing squeeze on incomes puts the brakes on household spending. The pound has fallen 1.6 per cent this month and is down 18 per cent since the Brexit vote in June. Recent retail-industry data suggest Carney’s outlook for consumer behaviour is also on the money.

The drop in the headline unemployment rate came as employment rose by 92,000 in the three months through January to a record 31.9 million. That was largely due to a jump in self-employment, with the number of employees rising just 17,000.

“All told, the combination of meagre wage growth despite very low unemployment supports the MPC’s view that enough slack remains in the labour market to warrant keeping rates on hold during the imminent period of high inflation,” said Samuel Tombs at Pantheon in London.