The Bank of England (BoE) just emptied a barrow-load of data onto global markets.
Britain’s central bank released its quarterly update on the economy (the Inflation Report), the interest rate decisions made in the latest Monetary Policy Committee (MPC) meeting and the minutes of the meeting all at the same time.
It’s “Super Thursday” as far as analysts are concerned.
Here are the headline developments in the documents the Bank just released:
- 8 members of the MPC voted to hold the BoE’s benchmark interest rate at 0.5%, 1 voted to raise it to 0.75%.
- Over the last quarter employment hasn’t risen, but wages have, which is a fairly healthy development for the labour market.
The Bank now expects 3% wage growth and a 1.25% increase in employment this year.
Back in May, the Bank had a 2.5% wage growth and 1.75% employment growth forecast.
- Inflation will pick up a little bit more slowly because of the second slump in global oil prices recently, but should still go back to 2% in two years.
For the months ahead inflation will hold close to zero.
- The domestic recovery is still pretty strong. The global picture for growth is solid if not particularly impressive.
The 8-1 split on interest rates is a little more consensual than most analysts expected. Most thought at least both Ian McCafferty and Martin Weale, the most hawkish members of the committee, would break ranks and vote for an increase in interest rates. Others expected a third member might join them, especially after Governor Mark Carney’s recent hawkish remarks.
The general picture seems pretty similar to the May report — the British economy is firing on most cylinders. 2.8% GDP growth this year is expected, followed by 2.6% growth in 2016 and 2,5% in 2017. Wage growth is still a lot weaker than the Bank expected it to be by this point in the recovery, but that seems to finally be picking up.
There’s something new going on in the British labour market though. Unemployment is actually a little higher than the Bank expected, for the first time in a while — over the last couple of years, the Bank has been constantly more pessimistic than reality about the UK’s jobs upswing.
Wage and productivity growth, on the other hand, is a little stronger than expected. That’s the change in the labour market right now. Very rapid gains in employment are giving way to some pay rises after several long years of negative real wage growth.
And that more than anything else is the sort of development that would generally push the Bank towards a rate hike. It’s a classic sign of a tightening labour market, which should produce some inflation. The recent period of extremely low inflation has been led primarily by oil prices, and it’s therefore temporary in nature — there’s only so far prices can fall — wage growth, on the other hand, could provide sustained upward pressure on inflation for years ahead.
Inflation will increase a bit mechanically towards the end of 2015, since the big fall in oil prices happened at the end of 2014, so that impact will weaken. But since oil prices have had another fall again recently, the overall impact of falling energy prices won’t really leave the inflation figures until the middle of 2016. So in the short term,
There’s also a portion of the report that discusses the National Living Wage, the Treasury’s new plan to increase the minimum wage. Despite the fact that it will affect three million people directly, the Bank expects the increase to raise aggregate pay in the economy by less than 0.5% gradually over five years. Similarly, changes made to the fiscal plans in the Summer Budget are not expected to have a big impact on the economic picture.
Overall, it’s a slightly strange picture. In a lot of ways the economy is pretty much as it was left in May, but the recently stronger wage growth and Carney’s hawkish comments had reasonably led analysts to think that the decisions and comments made might lean a little more towards a rate hike. There’s really not much sign of that in the report, vote or the minutes, and so markets may well read it as more dovish than expected.
The inflation report also mentions some outside risks, like the recent explosion and collapse of Chinese stock prices, as well as the turmoil in the Greek economy. Neither seems to be worrying Britain’s monetary authorities too much, but they’re keeping an eye on it.