Wage rises may break Bank of England's united front on forward guidance

Thu Feb 27, 2014 9:47am EST
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By David Milliken and William Schomberg

LONDON (Reuters) - Wage growth is likely to be the fault line that splits Bank of England policymakers who, for now, are presenting an unusually united front.

In a string of speeches and interviews since the Bank announced its new guidance policy on February 12, Monetary Policy Committee members have stressed that the BoE is not going to start weaning Britain's economy off record-low interest rates soon.

"There's a remarkable degree of the MPC being on message," said David Tinsley, UK economist at BNP Paribas.

Data on Wednesday showed business investment and exports finally starting to pick up, something the BoE is counting on to sustain 2013's strong recovery. And inflation is below the BoE's 2 percent target for the first time in over four years.

But beneath the apparent unity among policymakers, there are big uncertainties about how much scope Britain has to catch up on the growth it lost after the financial without triggering inflation.

Economists expect differences among the MPC to emerge as wages start to pick up and test how much slack there really is in Britain's economy, and whether productivity can improve fast enough to avoid a surge in prices.

MPC member Ian McCafferty said wage deals early in 2014 would be "quite critical" for the inflation outlook.

However, McCafferty added there would still be plenty of debate about the extent to which higher wages would push up inflation, and whether the large number of people still out of work or wanting to work extra hours would keep a lid on wages.   Continued...

The logo is seen at the Bank of England in the City of London January 16, 2014. REUTERS/Luke MacGregor