(Corrects month of meeting in second paragraph.)
Mark Carney’s focus on weak wages to keep record-low borrowing costs is up against one key foe: the strongest economic growth in the Group of Seven.
Minutes of the Monetary Policy Committee’s August meeting this week will show how the nine members voted when they kept the key interest rate on hold and where the fault lines in their thinking lie. Last month, some said the threat to the recovery from an increase had diminished as growth becomes “more established.”
In the year since he introduced his forward-guidance policy, Carney has shifted the focus from the unemployment rate to spare capacity and now to wages as evidence that the economy can continue to grow without fueling inflation. While the governor said last week the MPC has a “wide range of views” on the level of slack in the economy, indicating it isn’t unified in its analysis, continued pressure on the recovery from a stagnant euro area and geopolitical risks may defer tightening.
“If there’s not a split in August, the minutes will probably suggest that one’s not far away,” said Stuart Green, an economist at Banco Santander SA in London. Still, “even the hawks might think that things can run a bit further. They might want to see how unemployment and wage data evolve over the next one or two months before voting for a hike.”
Eleven of 18 economists in a Bloomberg News survey predict the committee voted 9-0 to keep the benchmark rate unchanged at 0.5 percent this month. The remainder forecast at least one dissenter. The central bank will publish the minutes at 9:30 a.m. on Aug. 20.
Weak pay growth is at odds with record payrolls and the conflicting data is stumping policy makers.
Carney’s focus on wages was promoted in the BOE’s quarterly Inflation Report on Aug. 13, when the central bank said annual earnings growth at the end of this year would be half what it previously predicted. Data that day showed wages fell for the first time since 2009 in the second quarter.
In an interview in the Sunday Times published yesterday, the governor said an expectation of a recovery in earnings may be enough to push the MPC toward policy tightening.
“We have to have the confidence that real wages are going to be growing sustainably” before rates begin to rise, he said. “We don’t have to wait for the fact of that turn to do so.”
Carney said it was “entirely healthy” for MPC members to have different opinions “and it is to be expected at a time when decisions become more finely balanced,” but that the committee is united in the view that the pace of tightening should be “gradual.”
Also clouding the outlook is conflict in regions including Ukraine and Gaza and the unexpected stall in the euro-area recovery, which may add to the case for keeping rates at emergency levels. Carney said last week Britain’s expansion “faces some challenges.”
“There are a few more things on the horizon which are giving them pause for thought,” said Mike Amey, a money manager at Pacific Investment Management Co. in London. “There’s some discomfort, they don’t know what’s going on with the wage numbers and until they’ve got better clarity on that, they don’t feel that the recovery is sufficiently well-entrenched to pull the trigger.”
Low inflation is giving the BOE room to keep the key rate on hold. Economists forecast price growth slowed to 1.8 percent in July, according to a survey before data tomorrow. The central bank sees inflation staying below its 2 percent target until the end of the forecast period in 2017.
Adding to the policy dilemma is the strength of the economy. The BOE last week raised its projection for 2014 growth to 3.5 percent. That’s more than twice the 1.7 percent the International Monetary Fund has predicted for the U.S. The central bank also said slack is being used up faster and lowered its productivity forecast, raising the risk the economy faces faster inflation.
While dissent may come from policy maker Martin Weale, who has said rates should return to more normal levels as the economy improves, he said in June that his decision would be informed by the labor market and wages.
For now, Carney’s comments last week suggest the bank is willing to keep policy loose until the recovery is assured. Citigroup Inc. and Berenberg Bank changed their forecasts for the first rate increase to the first quarter next year from the final three months of 2014.
“Slack is uncertain but rate setters can see that unemployment is falling quickly,” said Rob Wood, an economist at Berenberg in London and a former central bank official. “With economic uncertainty higher now than a few months ago and BOE chief Carney’s latest words, the risk of a majority of rate setters backing an early hike has receded significantly.”