“Not more forward guidance, surely,” says Alistair Osborne in The Times. “Hasn’t Mark Carney tried that often enough?” In 2013 the governor said the Bank of England would start thinking about raising interest rates when unemployment fell below 7%. Now it’s at 4.3%, but rates never rose. Before the EU referendum there were two other occasions when he appeared to signal a rise would come soon. Then he cut them after the vote.
No wonder, then, that many were sceptical last week when the Bank struck an unexpectedly hawkish tone. A majority of members of the Monetary Policy Committee now apparently thinks that “some withdrawal of monetary stimulus is likely to be appropriate in the coming months”. This was enough to bring market expectations of the first rate hike forward from 2019 to March 2018. Sterling bounced to around $1.36, its highest level since the Brexit vote.
The renewed discussion about raising rates just underlines what a “blunder” last year’s post-vote cut from 0.5% to 0.25% was, as Neil Collins notes in the Financial Times. It was borne of sheer “panic”. Had the bank refrained from doing so, “would anyone be arguing now that 0.25% was a more appropriate rate”? The economy certainly seems healthy enough to cope with the reversal of the 2016 cut. Inflation is at a joint five-year high of 2.9% – just 0.1% below the level at which the governor has to write to the chancellor to explain what he is going to do about missing the 2% target by a whole percentage point. The data remains relatively healthy and the labour market is growing ever tighter.
Yet “the link between unemployment and wages has broken down”, says Chris Giles, also in the FT. Usually, once unemployment reaches a certain level, wages take off. But this time around, “however tight the labour market appears to get, wages seem stuck at growth rates of about 2%”. Still, that probably won’t continue much longer, reckons Jeremy Warner in The Sunday Telegraph. Weak wage growth is due to globalisation and, in some cases, improvements in technology.
Consider compliance, which has seen “myriad jobs” created because technology allows modern finance to be “monitored as never before”. But compliance has no economic value and has depressed overall productivity – and hence wages. Still, the link between wage growth and labour-market tightness must kick in at some point. And with the public-sector pay cap gone, that point may be now. The unions “scent blood” from a weak government. “Once the dam is breached in the public sector, above-inflation pay rises will flow quickly into the wider economy.”