'Unreliable boyfriend' Mark Carney signals re-think on UK interest rates
Bank of England governor Mark Carney has hinted at a fresh re-think on interest rate policy as he appeared to dampen the prospect of an imminent hike by shifting the focus for any decision on to pay growth.
Latest figures show wage rises running at 0.3%, well below inflation at 1.9%, meaning that it is falling in real terms.
Mr Carney said policy-makers would "update thinking" at next month's quarterly Inflation Report on how to take into account the prospects for pay.
He also warned of the continuing dangers to the recovery, as risks facing the economy amid public sector austerity, private sector debt, and a soaring pound would take time to fade.
But his remarks, during a speech at the Commonwealth Games in Glasgow, are likely to revive accusations that he is moving the goalposts on monetary policy which have seen him labelled an "unreliable boyfriend".
The comments appear to indicate a new update of Mr Carney's flagship "forward guidance" policy, which initially focused on the rate of unemployment as a threshold for when rates could rise - until this fell much more quickly than expected.
This was soon replaced by the concept of "slack", a wider but more opaque measure of wasteful spare capacity in the economy which the Bank's Monetary Policy Committee (MPC) said would have to narrow before rates could rise.
But this measure has proved hard to judge because of apparently conflicting signals from the labour market showing that while employment is improving strongly, wages are stagnant.
In his speech, Mr Carney said the wages data suggested there was more labour supply than previously thought though spare capacity "is being used up a bit more rapidly than we expected".
"A key judgment for the MPC is when and to what extent these developments will translate into real wage growth, and in turn that wage growth into price pressures," he said.
"Next month's Inflation Report provides the next opportunity to update our thinking on these important questions."
It is the latest apparent shift of emphasis from the governor on interest rates.
At the launch of May's inflation report he appeared to dampen expectations of a hike but a month later used the annual Mansion House speech to warn that a rise could come sooner than markets thought.
Mr Carney also used today's speech to reiterate that when rates do start to rise it will be "gradual and limited".
He said: "This is in part because the headwinds facing the economy are likely to take some time to die down.
"These headwinds include public balance sheet repair, a highly-indebted private sector likely to be particularly sensitive to interest rates, as well as the drag from a 12% appreciation of sterling over the past year and the persistent muted demand from our main export markets."
Mr Carney's focus on wage growth echoed a passage in the newly-released minutes of the latest MPC meeting.
It pointed to the increasing uncertainty over the measure of "slack", adding: "In light of this uncertainty, an argument could be made for putting more stress on the expected path of costs, particularly wages, in assessing inflationary pressures."
The minutes indicated the MPC's nine members were divided over whether an early interest rate hike would derail the recovery - with "striking" weak wage growth leading some to urge caution.
They showed the committee voted unanimously to keep rates at 0.5% earlier this month but analysts said their discussion revealed the intensifying debate over the timing of a rise.
Some toyed with the idea that Britain might be ready for an early rate hike experiment and argued that the risk of this "derailing the expansion" had receded as Britain's recovery had become more established.
But others put forward an alternative view that an unexpected hike in interest rates at a time when wage growth remained weak could destabilise the recovery.
The minutes also pointed to signs of housing activity cooling as well as indications of fading global growth.
Policymakers have held interest rates at the historic low of 0.5% for more than five years to nurse the economy back to health from recession.
But the accelerating recovery has brought forward expectations about when they will rise again, as the Bank tries to keep a lid on the future path of inflation while at the same time not stopping growth.
Many experts forecast a rise early next year but some brought forward their forecasts to this November in the wake of Mr Carney's Mansion House speech.
Chris Williamson, chief economist at Markit, said: "Policymakers at the Bank of England's latest Monetary Policy Committee meeting continue to stress that interest rates are likely to only go up very gradually when they do start to rise, but the debate over the timing of the first hike appears to have intensified."
John Bulford, economic advisor to the EY ITEM Club, said: "The MPC will ultimately make its decision with a heavy nod towards where wage growth is headed, rather than where it has been.
"With this in mind, it looks likely that the first rate hike will come in early 2015, a little later than markets currently anticipate."
Belfast Telegraph Digital