Strong jobs market, but weak wage growth will push back interest rate decision - EY ITEM Club comments
16 July 2014
- A slide in the unemployment rate to 6.5% comes as no surprise…
- …but earnings growth continues to disappoint…
- …leaving an interest rate hike in Q1 2015 as the most likely outcome
John Bulford, economic advisor to the EY ITEM Club, comments on today’s unemployment figures:
“Solid growth in economic activity, growing backlogs of work, and improving business optimism regarding the economic outlook continues to translate into surging demand for extra staff.
“The decline in the headline unemployment rate will provide ammunition for interest rate hawks. But the MPC has made it clear that it will be looking for signs of a pick-up in wage growth before it hikes interest rates and the latest data provides no evidence of this.
“The sharp contrast between the strength of the jobs market and the weakness of wage growth leaves the MPC in a difficult position. They will be keeping a close eye on various indicators of labour market slack as these are considered the precursors to a pick-up in wage growth. This is particularly true of this release as it will be the last published before the Bank compiles the August Inflation Report.
“On balance, we expect the MPC to begin raising rates from early 2015. The continued absence of any wage-led inflationary pressure, alongside recent signs in the output data that the economy's expansion may be cooling a touch, should stave off any desire among the MPC to hike interest rates this year.”