Bank of England Governor Mark Carney declared this week that “now is not yet the time to raise interest rates”, noting that “the world is weaker and UK growth has slowed”. Markets now don’t expect a rate hike until early 2017.
Meanwhile, the annual rate of consumer price inflation (CPI) ticked up to 0.2% in December. In 2015 as a whole, CPI didn’t rise – the first time this has happened since records began in 1950, noted Capital Economics. The unemployment rate fell to a ten-year low of 5.1% in the three months to November, while annual pay growth remained subdued at 2%.
“It’s just as well” that Carney is the governor of the Bank of England, said Fraser Nelson on Spectator.co.uk, as “he’d have made a lousy forecaster”. In August 2013 he said he’d raise rates when unemployment slipped below 7%, expecting it to take three years – it took only five months. Then last summer he sounded hawkish, saying that a decision on whether to hike would come into “sharp relief” at the turn of the year. This time, he “didn’t even bother dropping a hint” that rates could rise this year.
One key factor for gauging the turn of the interest-rate cycle is wage growth, and here the recent dip “seems likely to be fleeting”, reckoned Samuel Tombs of Pantheon Macroeconomics. The labour market continues to tighten rapidly. Unemployment is below the 5.3% average in the decade to 2008. The number of job vacancies has risen to a record high: firms are struggling to find the right people. Then there’s the national living wage, to be introduced in April.
Core inflation, already 1.2%, could be at 2% by the second half of 2016. A rate rise could come “sooner than markets expect”.