The Bank of England appears unlikely to raise interest rates until inflation spreads to wages, according to the bank’s latest policy minutes.While three member were ready to hike rates, another wanted to expand quantitative easing and five more wanted to maintain current policy.
What’s interesting are the five potential members who could be turned from the status quo, to a tightening policy. The trigger for them appears to be wage inflation alone.
The risk that increased inflation expectations might become entrenched in wage and price-setting was material, but there was no evidence yet of that crystallizing. Wage growth remained low. It was still too early to know whether the slowdown in growth towards the end of 2010 had been temporary, or whether the weakness in the contemporary indicators of household spending heralded a more protracted weakness in consumption growth. But the news over the month about demand and activity had probably been to the downside. An increase in Bank Rate in current circumstances could adversely affect consumer confidence, leading to an exaggerated impact on spending.
This is the same fact that is currently holding back Fed policy makers. They, like the five at the Bank of England, don’t believe in hiking rates until inflation is reflected in wages.
And right now in the UK, we’re not seeing any signs of wage growth.
From the National Statistics Office (April 13):
Average earnings growth including bonuses decreased in the year to February 2011, from the January 2011 rate of 2.3 per cent to 2.0 per cent in February 2011.Growth in average earnings excluding bonuses (regular pay) decreased from the January 2011 rate of 2.3 per cent to 2.2 per cent in February 2011.
And charting that, it shows no signs of alarming growth:
Photo: UK National Statistics