Stagnant wages should stay Bank of England’s hand

Bank of England (BOE) policy maker Kristin Forbes suggested that the need to restrain inflation might “soon suggest an increase” is required in interest rates. The central bank’s latest survey of businesses, however, suggests weakening pay growth should persuade the bank to keep borrowing costs on hold.
The bank’s regional agents regularly survey about 700 businesses around the U.K. The most recent round-up, published on Wednesday, shows an alarming drop in expectations for wage growth. Companies are expected to increase wages by an average of 2.7 percent in 2016. For this year, though, the prediction has dropped to just 2.2 percent.
Combine that with the Bank of England’s forecast that inflation will accelerate past its 2 percent target this year, and it’s clear that Britons face wage stagnation. In the survey detail, companies said economic uncertainty is expected to restrain pay rises, offsetting difficulties in recruiting and retaining staff.
These regional surveys have been a pretty good predictor of what wages will do. They’ve certainly been more accurate than the Bank of England’s own estimates, which have consistently overestimated wage increases by as much as 1.5 percentage points in the past few years.
The central bank left its key interest rate unchanged at 0.25 percent when its monetary policy committee met last on Thursday. Since that meeting, traders have scaled back expectations for how high interest rates might rise in the coming three years.
The derivatives market sees less than a 25 percent chance of an interest rate increase this year; you have to go
all the way to the bank’s August 2018 meeting before the likelihood rises past 50 percent.
As I wrote last week, the Bank of England is right to allow inflation to surpass its 2 percent target for a while. Consumer price gains have been so low for so long — inflation averaged just 0.1 percent in 2015 and 0.6 percent in 2016 — that a period of above-target price gains is warranted. And with pay stagnating, keeping borrowing costs on hold is
the key contribution the central bank
can make to preventing Brexit uncertainty from undermining consumer
confidence.
—Bloomberg