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BoE’s Weale: Slower wage growth a concern, no immediate need to hike

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 21, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - Martin Weale, one of the Bank of England's policymakers who has been hawkish in his stance so far supporting raising rates from BoE’s record low levels, threw in quite a surprise when in an interview with The Telegraph he said tighter monetary policy was “slightly less immediate". Falling oil price and poor wage growth which is keeping a lid on prices is believed to have altered Weale’s thinking.

    Average weekly earnings, including bonuses, grew by 2.4pc in the three months to October compared with the same period a year ago and lower than the 3 per cent growth seen in the three months to September. Considering the slower wage growth as well as the slump in commodity prices led Weale to opine "The factors pushing down on inflation have become a bit more prolonged.” The poor wage growth scenario has continued longer than most policy makers had expected. Weale said, "I initially thought that the weak wage growth was a wobble that represented stray numbers that you get once or twice from time to time. There has plainly been something more to it than that," he said. BoE’s deputy governor Minouche Shafik is also of the opinion that "plateau" in pay growth will ensure lower rates for a longer time.

    Weale also believes sterling's strength against the euro was a significant factor hindering a rate hike. Uncertainty over Brexit might also hurt investment and slow growth in the coming months. The government will likely hold a planned referendum on Britain's membership of the European Union within the next two years. The BoE needs to consider these concerns as well.

    Thus, according to Weale the Monetary Policy Committee (MPC) would now assess the extent of the impact of the impact of these factors on inflation before deciding on when to raise interest rates. However he has warned that if low rates are left on hold for too long it will begin to weigh on the process of economic recovery. To ensure inflation did not surpass the Bank's target in the medium term, he said it is required that rates are raised before the start of 2017. "My sense is that to keep inflation on target, rates need to be at some point higher than markets imply," he said.

    The markets, before the release of the wage data were of the opinion that BoE will not raise rates until late 2016 or early 2017. A Reuters poll had even predicted the first hike to come in May. However the latest wage data has led economists to stress that their forecast will probably have to be pushed further.

    While speaking on the impact of the interest rate on the economy, Weale said "a little bit earlier" than the 18-24 month horizon seen by economists.
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