Pound Drops as BOE’s Shafik Says Pay Jump Needed for Rate Boost

The U.K. currency halted two weeks of gains versus the dollar, dropping from a three-week high, as Shafik said wage pressures aren’t yet strong enough to justify a rate increase.

Bank of England governor Mark Carney has already said a decision to raise rates in the U.S. is “not decisive” for United Kingdom policymakers, stressing any such move on these shores will be made according to United Kingdom economic conditions.

Mario Draghi, president of the European Central Bank, last week announced a cut to overnight deposit rates from minus 0.2% to minus 0.3% and extended a 60 billion euro (£43 billion) stimulus programme by six months.

“I will wait until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target before voting for an increase in Bank Rate”, Shafik said, in a speech to be given at the Institute of Directors on Monday.

Ms Shafik occupies one of nine seats on the Bank’s Monetary Policy Committee (MPC), which meets regularly to decide on interest rates.

Many economists expect rates in Britain to start increasing in the first half of 2016, despite comments by the Bank that it could be 2017 before a rise.

In the bank’s minutes, the company noted that while the “downside risks to growth in emerging market economies” remains intact, it’s not without “risk of an acceleration of capital outflows in reaction to any increase in USA interest rates”.

“There are many signs that the economy is normalising – the labour market is tightening, consumption growth is solid, investment is recovering, and even productivity growth is showing tentative signs of a return”, Shafik said.

Asked for her response to the Government’s decision to implement a national living wage, Dr Shafik said: “Our estimates are that it will have a modest effect on total wage growth”.

Last week the MPC voted to hold interest rates at 0.5% for another month, extending the spell of record low rates that has lasted since March 2009.

“The problem for (the Bank’s) hawks is that inflation needs to show more life and, before late Q1, hope for that looks slim”, said Todd Elmer, a strategist with Citi. If the Bank follows through on the report, interest rates could reach eight years at 0.5 per cent.

Financial markets are now pricing in a United Kingdom rate hike around the end of next year, while economists polled by Reuters mostly expect it to happen by mid-2016.

Ms. Shafik’s remarks suggest she anticipates the need for a faster pace of rate increases to keep inflation in check, although she stressed that future increases in borrowing costs are likely to be gradual and limited when compared with precrisis norms.