BOE keeps interest rates low amid wage growth
Print Edition
The Bank of England kept interest rates at a record low once again yesterday, as its policy-makers grappled with how to balance improving wage growth in Britain against more ominous signals from the global economy.
The BOE鈥檚 Monetary Policy Committee, as expected, left its Bank Rate at 0.5 percent, where it has been since the depths of the financial crisis more than six years ago, and made no statement. The outlook for BOE interest rates hinges to a large extent on how rapidly British wage growth picks up, which was a key focus of a government budget presented by finance minister George Osborne on Wednesday.
Osborne announced a new national minimum wage for those aged 25 and over, which some economists said could boost the chances of an interest rate hike in the coming months.
鈥淭he ... introduction of a 鈥榣iving wage鈥 may well 鈥 given the tight labor market 鈥 lift pay growth, especially at the bottom end of the pay scale,鈥 said Michael Saunders, chief UK economist at Citi. 鈥淭his prospect probably makes it more likely that the MPC will hike rates in the next few quarters, unless external factors, for example Greece, threaten to derail the UK recovery.鈥
The past month has seen a renewed divergence in comments from MPC members about the risks to the outlook for British inflation, which turned positive again in May after dipping below zero for the first time in 55 years.
Martin Weale suggested he would soon vote to increase interest rates 鈥 as he did through the second half of 2014 鈥 because of the swift improvement in wages. These grew at their fastest pace in nearly four years in the three months to April.
His MPC colleagues Kristin Forbes and Deputy Governor Jon Cunliffe have also noted the significance of an improving labor market. But Andy Haldane, the BOE鈥檚 chief economist, cautioned against an early rate, saying such a move could be 鈥渟elf-defeating鈥 as Britain and other major economies struggle to overcome the lasting scars from global recession.
BOE Governor Mark Carney said last week that Greece鈥檚 debt crisis was the biggest looming threat to financial stability in Britain, while a slowdown in China also threatens to derail global economic growth.
Business surveys this week pointed to solid economic growth, albeit reliant on consumer spending and the country鈥檚 vast services sector rather than manufacturing and exports.
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