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Jul 23, 2014

Bank of England's Carney sees conflicting signals from jobs market

Earnings remain weak, rising just 0.3 per cent in 3 months
By Alistair Smout
    
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GLASGOW, Scotland (Reuters) — The Bank of England is weighing up conflicting signals from Britain's labour market as it prepares to start raising interest rates from their record low, BoE Governor Mark Carney said on Wednesday.

Britain's economy is now back to its size of before the financial crisis but the mismatch between strong jobs growth and weak earnings was giving the central bank pause for thought, Carney said.

"As the economy normalizes, Bank Rate will need to start to rise in order to achieve the inflation target," Carney said in a speech to business leaders in Glasgow that covered similar ground to his recent public comments.

"But the MPC (Monetary Policy Committee) has no pre-set course and the timing of any increases in interest rates will be determined by the data."

Earlier on Wednesday, the BoE said its policymakers discussed at their July meeting if there was a case for an early interest rate rise but were held back in part by pay growth that was strikingly low given Britain's strong job creation.

The Bank has held interest rates at a record low of 0.5 per cent since the depths of the financial crisis in 2009. A strong recovery since last year makes it likely to be the first major central bank to raise interest rates, either late in 2014 or in early 2015.

In his speech, Carney said the MPC was "balancing the implications for inflation of hard evidence of sustained economic momentum against conflicting signals over the degree of slack in the labor market".

Earnings rose just 0.3 per cent in the three months to May compared with same period last year, according to official data, although changes to income tax levels distorted the comparison.

Carney nodded to the difficulty of judging how much inflationary pressure might be building up, despite the low pay growth seen so far, something that is expected to cause a split among BoE policymakers soon on the need to tighten policy.

"While some indicators such as wages suggest that there was more labour supply than we had previously thought, it is also true that spare capacity is being used up a bit more rapidly than we had expected," he said.

The Bank earlier this year pointed to a broad range of measures of spare capacity as the best guide to when it might start to wean the British economy off its super-low interest rates. Previously it had said it would start to consider raising rates when unemployment fell to seven per cent, but that happened much faster than the Bank had predicted.

Carney said the publication of the Bank's new quarterly economic forecasts on August 13 would give it a chance to update its thinking.

He reiterated the Bank's guidance that when interest rate increases begin, they will be "gradual and limited" because the British economy will still face headwinds, including from the 12 per cent appreciation of sterling over the past year.

Carney also repeated his view that the biggest home-grown risks to Britain's economy were in the housing market but that household debt levels did not pose an immediate threat.

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