UK wage and inflation data this week are likely to support arguments from Bank of England policy makers who want to keep raising interest rates, adding to the quickest surge in borrowing costs in three decades.
(Bloomberg) — UK wage and inflation data this week are likely to support arguments from Bank of England policy makers who want to keep raising interest rates, adding to the quickest surge in borrowing costs in three decades.
Economists expect two separate reports will show that consumer prices are still rising at a double-digit pace and that companies are boosting pay at the quickest pace on record, excluding the year that was distorted by pandemic lockdowns.
BOE Governor Andrew Bailey and his colleagues have signaled they’re near the end of the hiking cycle that started 14 months ago and brought the key rate from near zero to 4%, the most since 2008. Nevertheless, they also view a tight jobs market and building pay pressures as a potential stumbling block in their battle to rein in inflation.
“Evidence that wage pressures are continuing to rise should keep pressure on the Bank of England to hike rates further,” said Sonali Punhani, head of UK economics at Credit Suisse.
Investors, who just a few months ago anticipated rates rising to 5% or beyond, now are fully pricing in just one more quarter-point hike by the middle of the year. While Bailey has opened the door to a pause but also warned about risks that would force the bank to raise more sharply.
With the economy stagnant in the final quarter of last year and a slump likely to last until 2024, the BOE and Prime Minister Rishi Sunak are under pressure to ease off on their efforts to contain the worst bout of inflation since 1981.
The Consumer Prices Index leaped 11.1% in October and then ticked down to 10.5% in December. Official figures due on Wednesday are likely to show it remained above 10% in January, according to a survey of economists by Bloomberg.
The labor market is a bigger concern. Bailey and his colleagues have said a shortage of workers is fueling upward pressure on wages, threatening to feed an inflationary spiral. While Bailey has seen signs those pressures are starting to ease with a dip in job vacancies, official wage data has proved stubbornly strong.
What Bloomberg Economics Says …
“The BOE has signaled it’s nearing the end of its hiking cycle. But another batch of jobs data showing a still tight labor market and sticky wage pressure will likely keep the committee from pausing just yet.”
—Niraj Shah, Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the PREVIEW.
Average weekly earnings excluding bonuses probably grew 6.5% in the fourth quarter, up from 6.4% in the previous three-month period, the Bloomberg survey showed. Those figures would be the highest on record after 2021, when lower-paid workers dropped out of the survey because their employers shut during the pandemic.
James Smith, economist at ING, warned that wage pressures have continued to accelerate in recent months, predicting that regular pay growth will edge up further.
“I’d expect that to gradually change. I think wage growth probably is near a peak. There was a hint of that in the latest decision maker survey from the Bank of England last week.”
Divides have emerged on the BOE’s nine-member Monetary Policy Committee about whether more action is needed to put a lid back on price pressures.
Silvana Tenreyro said last week she’s considering a cut to interest rates as she believes monetary policy is “already too tight.” She warned that only around a fifth of the tightening from previous rate rises have come through to the economy.
However, Jonathan Haskel, another external member of the MPC, took a far more hawkish stance, saying that “economic theory suggests that uncertainty around the persistence of inflation should be met with more forceful action.”
–With assistance from Harumi Ichikura and Joel Rinneby.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.