Pay Growth Slowdown Holds Back Rates Hike

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 some reasons why they’re (likely) to act before we do so…”

Such a small move in the year-on-year rate in November would normally be a case of “steady as she goes”.

“I think it is interesting to note that surveys of economic forecasters – a more direct measure of the expected future path of interest rates – show expectations for a faster pace of increases in Bank Rate”.

Brent futures dropped to a seven-year low on Friday, a day after Mark Carney and the Monetary Policy Committee said low oil prices and subdued wage gains are increasing the risk that price growth will take longer to pickup than they now anticipate.

There are positives from continued low inflation; it has now held in a narrow band around 0 percent since February, against a primary target of monetary policy to keep it at 2 percent.

“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”. “The economy is robust, jobs growth is strong, but there is no wage inflation”. While economists predict the first full quarter-point increase will come in the second or third quarter of next year, investors are betting it won’t happen until 2017.

BOE Deputy Governor for Markets and Banking Minouche Shafik said on Monday that wage pressures aren’t yet strong enough to justify a rate increase and that she will “proceed with caution” on the timing. In their December policy statement, officials weighed “robust growth” in spending against weak overseas demand and said feeble inflation gives them room to maintain emergency settings for now.

And with inflation remaining in negative territory – at minus 0.1% in October – there is little rush for the MPC to pull the trigger on a rate rise. If the Bank follows through on the report, interest rates could reach eight years at 0.5 per cent.

The unexpected weakness immediately hit sterling, which briefly fell below the key $1.50 barrier against the dollar to $1.499 before settling around 0.5 cents lower against the greenback and the euro. “There are many signs that the economy is normalising”, Shafik said.

“As already discussed, households with high debt-servicing costs may be most vulnerable to a rise in interest rates”, the report said.

Interest rates have been heading downwards over the last few quarters, on the back of falling inflation.