BoE still weighing up when to lift rates

Published Jul 24, 2014

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Alistair Smout Glasgow

The Bank of England (BoE) was weighing up conflicting signals from the labour market as it prepared to start raising interest rates from their record low, central bank governor Mark Carney said yesterday.

Britain’s economy is now back to its size of before the financial crisis but Carney said the mismatch between strong jobs growth and weak employee earnings was giving the central bank pause for thought.

He added: “As the economy normalises, the bank rate will need to start to rise in order to achieve the inflation target. But the MPC [monetary policy committee] has no preset course and the timing of any increases in interest rates will be determined by the data.”

Earlier yesterday, the central bank said its policymakers discussed at a meeting this month if there was a case for an early interest rate rise but were held back in part by pay growth that was strikingly low given strong UK job creation.

The bank has held interest rates at a record low 0.5 percent since the depths of the financial crisis in 2009. A strong recovery since last year makes it likely to be the first major central bank to raise interest rates, either late this year or early next year.

Carney said the MPC was “balancing the implications for inflation of hard evidence of sustained economic momentum against conflicting signals over the degree of slack in the labour market”.

Employee earnings rose just 0.3 percent in the three months to May compared with the same period last year, according to official data, although changes to income tax levels distorted the comparison.

Carney nodded to the difficulty of judging how much inflationary pressure might be building up, despite the low pay growth seen so far, something that is expected to cause a split among central bank policymakers soon on the need to tighten policy.

“While some indicators such as wages suggest that there was more labour supply than we had previously thought, it is also true that spare capacity is being used up a bit more rapidly than we had expected,” he said.

The bank pointed earlier this year to a broad range of measures of spare capacity as the best guide to when it might start to wean the British economy off its super-low interest rates. Previously it had said it would start to consider raising rates when unemployment fell to 7 percent, but that happened much faster than the Bank of England had predicted.

Carney reiterated guidance that when rate hikes began, they would be “gradual and limited” because the economy would still face headwinds, including from the pound’s 12 percent appreciation over the past year. – Reuters

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