The Bank of England, as predicted by City analysts, left UK interest rates on hold 0.5% today. Which means this morning’s meeting needed to lay some grit and sand for what must be an inevitable May interest rate hike.
Did they – and what gaps were filled? First, a rate rise looks a dead cert for the next 10 May monetary policy committee meeting (there’s no meeting in April).
An “ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon,” the Bank of England said in its statement.
There was also agreement future rate climbs would be “at a gradual pace”. But pressure for a May hike is being fuelled by impatience from MPC committee members Michael Saunders and Ian McCafferty who want a rate increase now to swerve possible hastier moves upwards later.
Slack is narrowing – Saunders and McCafferty
Both Saunders and McCafferty saw “widespread evidence that slack was largely used up and that pay growth was picking up, presenting upside risks to inflation in the medium term”, the minutes noted. Both were out-voted by the seven other members, including Governor Mark Carney.
Earlier this week February headline inflation fell to 2.7% from 3%, the lowest figure since last July. Core inflation – the measurement which strips out more volatile goods like energy prices – dipped to 2.4% from 2.7%, more than expected.
However those slipping inflation figures were more or less brushed aside by chief economic adviser to the EY ITEM Club Howard Archer. He warned that falling inflation would “make little difference to the monetary policy outlook and we expect this week’s meeting to prepare the ground for the MPC to hike rates again in May”. As they clearly have.
Inflation still remains way above the Bank of England’s preferred 2% benchmark target. When Britain voted to exit the EU, inflation was hovering at just 0.8% and close to zero preceding that – though the Brexit vote changed that, seeing inflation rise to a 3.1% high last November. But a steadily recovering pound means inflation, to some extent, is being steadily flushed out of the system.
Wage growth is on the up – at last
Fast forward to early 2018 and UK worker pay is rising, finally, and faster than expected – as Michael Saunders and Ian McCafferty warned at midday. This week the Office of National Statistics said UK pay inflation surged to a two-year high in the three months to January, signaling the end of close to 12 months of falling worker spending power, once inflation is absorbed.
The ONS also confirmed overall earnings climbed 2.8%, improving on a revised 2.7% figure for the quarter to December (the January figure needs to be treated with a measure of skepticism as the start of the year sucks in bonus-related wage numbers; excluding bonuses, earnings came in at 2.6% growth).