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.
“There may be some nuanced differences as you would expect terms of how that degree of slack will translate into wage pressures, and that’s what we need to watch,” he said in an interview with Reuters this week.
Unity on the MPC is not always the case. A year ago, the then governor, Mervyn King, was left in a minority of three calling unsuccessfully for a restart of the central bank’s 375 billion pound ($624 billion) asset purchase program.
But so far no policymaker has significantly challenged the implication in the BoE’s latest forecasts that markets are right to price in a rate hike in just over a year’s time.
The pattern would be a familiar one for Governor Mark Carney. In his previous job as head of Canada’s central bank, deputy governors were expected to agree with their boss in public, and there were no external officials to give an independent view.
Nonetheless, two BoE policymakers have offered signals that the balance of risks around the timing of a first rate rise is different to what the BoE forecasts imply.
Martin Weale - who voted against guidance in August - chose last week to talk about the possibility of the first rise in interest rates coming sooner than the spring of next year if average earnings rise more quickly than expected.
MPC member David Miles - the most persistent advocate for more stimulus in 2012 and 2013 - said policymaker’ estimates of slack in the economy were more widely spread than the 1.0-1.5 percent range published by the BoE, and that he thought there could be more.
Other officials have been more coy, leading to some different interpretations among analysts as to where their convictions lie.
BNP Paribas’s Tinsley interpreted a speech by MPC member Ben Broadbent as meaning there was significant scope for a catch-up in British productivity, while Berenberg economist Rob Wood saw it as pointing to an earlier rate rise.
British wages have been falling in real terms since the financial crisis, mitigating the impact on inflation from a slump in productivity.
But the central bank expects this trend to go into reverse in 2014. And on Wednesday the government said it was considering a 3 percent rise in the minimum wage, the first real increase since 2008 and one which would set a benchmark for better-paid workers too.
Berenberg’s Wood - a former BoE economist himself - said rising wages could prompt some MPC members to vote for a rate rise much sooner than their current comments suggest.
“The dovish camp is fading. You don’t have anyone really making a strong case that they can wait very much longer than Q2 2015. You have either people sticking very close to the party line or saying things that are slightly more hawkish.”
As unemployment continues to fall and wage growth pick up from its current 1.1 percent annual rate, one or two officials might start to vote for a rate rise as soon as August, Wood said, with a majority potentially in favor later this year.
“I think there is a real chance they do it in the fourth quarter of this year, in November or December.”
Writing by David Milliken, editing by William Schomberg/Jeremy Gaunt