BOE could delay rate hike over lack of wage growth

Wages hold the key to when interest rates will start rising. That much is clear from the minutes of the most recent meeting of the Bank of England’s monetary policy committee (MPC) and the speech by its governor, Mark Carney, in Glasgow on Wednesday.

Put simply, Threadneedle Street is struggling to explain what is happening in the economy. Growth is stronger than it envisaged when Carney became governor just over a year ago and unemployment is a lot lower at 6.5%. That would normally be consistent with a faster rate of earnings growth because employers have to offer higher pay to attract workers. Indeed, that is precisely what is happening in the US, where a tighter labour market is starting to lead to stronger earnings growth.

In the UK, it is a different story. Annual earnings growth is running at just 0.7% – or 0.3% if bonuses are included. That’s well below the current rate of inflation (1.9%), below where it was when the economy was flat-lining in 2011 and 2012, and hard to square with official data showing rapidly shrinking dole queues and more people in work than ever before.

Part of the fall in earnings can be put down to the timing of bonus payments in 2013, which were deferred to take advantage of the cut in the top rate of income tax to 45%. But the fall in earnings excluding bonuses suggests that other factors must be at work. Some members of the MPC, judging by the minutes, seem to think that the explanation lies with time lags. There tends to be a delay between an increase in the number of job opportunities and rising wages, and the relatively low level of job switching may mean that the lag is longer than usual.

Supporting evidence for this view comes from surveys of the jobs market. The Recruitment and Employment Confederation report on jobs is consistent with earnings growth of over 4%.