Bank of England slashes wages forecast

Wednesday 13 August 2014 11.38
The Bank of England has cut its forecast for wage growth this year in half
The Bank of England has cut its forecast for wage growth this year in half

The Bank of England slashed its forecast for wage growth today.

It also said that the speed of how wages picked up would be key to determining the timing and pace of interest rate rises. 

After official data showed UK average wages suffered a year-on-year fall in the second quarter of 2014, the Bank of England cut its forecast for wage growth this year in half to 1.25% before picking up  in 2015. 

The bank also forecast a bigger fall in unemployment than it had in its last set of forecasts in May, but otherwise left its projections for strong growth and contained inflation little changed. 

The forecasts are based on market assumptions that the Bank of England will raise interest rates in February next year, three months earlier than when the bank published its last forecasts in May. 

This rise would likely make Britain the first major economy to raise interest rates since the end of financial crisis. 

The central bank stuck with its pre-existing guidance that future rate rises would be gradual and to a level well below pre-crisis norms. It also indicated that wage developments would be key to the exact timing of a rate move. 

"In light of the heightened uncertainty about the current degree of slack, the Committee noted the importance of monitoring the expected path of costs, particularly wages," the Bank of England said in its quarterly inflation report. 

It said its policymakers now believed that there was spare capacity of roughly 1% of gross domestic product in the economy, down from around 1.25% in February and May. 

The BoE has said that it wants slack to be largely used up before it raises interest rates. The increased uncertainty about slack meant that there was a wide range of views on the rate-setting Monetary Policy Committee about how much there was left, the BoE said. 

Most economists polled by Reuters before this month's interest rate decision expected at least one MPC member to vote for a rate rise. Their voting record will not be published until next week. 

The UK economy looks set to grow faster than any other big industrialised nation this year, and house prices have jumped by 10% over the past year, raising fears of a new property bubble. 

But the economy has only just recovered its size from before the financial crisis, having taken far longer than most of its peers to get growth going again, and wage growth is strikingly weak. 

Figures released earlier today showed that wages fell by 0.2% in the second quarter of this year compared to the same point in 2013 - a bigger drop than Bank of England had pencilled into its forecasts, which were made before the data. 

But unemployment fell to 6.4%, and the bank expects it to drop even more than it forecast before, sinking to 5.4% in two years' time, lower than the 5.9% it predicted in May. 

However, this fall in unemployment does not necessarily point to inflation pressures. 

The Bank of England slightly revised up its growth forecast for this year to 3.5% from 3.4% - which would be one of Britain's fastest growth rates in more than a decade. It also said that it expected inflation - currently 1.9% - to be around 1.8% in two years' time. 

Economists polled by Reuters on average expect the Bank of England to raise rates in the first quarter of 2015, while financial markets see a roughly one in three chance of a move by November.