Investment Clock insights

Wage growth still too tepid for Bank of England rate setters


Ian Kernohan 

12 July 2017

In many ways this was another strong labour market report, with the employment rate at a record high and the unemployment rate falling to 4.5%, the lowest since 1975.  
However, policy makers at the Bank of England are faced with a puzzling shift in the relationship between unemployment and wages.  Growth in core average earnings (excluding bonuses), did improve but only marginally, and was up just 2% compared with a year earlier. 
Inflation is now above the Bank’s target level and real earnings growth has slipped into negative territory.  This is having a negative impact on household spending.  With uncertainty gathering over the Brexit negotiations, the Bank of England’s Monetary Policy Committee would need to see a distinct improvement in earnings growth towards 3% and above, to be in a position to raise interest rates.

In many ways this was another strong labour market report, with the employment rate at a record high and the unemployment rate falling to 4.5%, the lowest since 1975.

However, policy makers at the Bank of England are faced with a puzzling shift in the relationship between unemployment and wages.  Growth in core average earnings (excluding bonuses), did improve but only marginally, and was up just 2% compared with a year earlier. 

Inflation is now above the Bank’s target level and real earnings growth has slipped into negative territory.  This is having a negative impact on household spending.  With uncertainty gathering over the Brexit negotiations, the Bank of England’s Monetary Policy Committee would need to see a distinct improvement in earnings growth towards 3% and above, to be in a position to raise interest rates.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.