Will the Bank of England now consider a Bank Rate cut?

by Shaun Richards
Over the past 48 hours or so the international environment has changed quite considerably as China for the second day in a row has devalued its currency. My subject of yesterday has seen an official fixing move of 1.6%% to follow yesterday’s 1.9%. However for the moment I would like to leave that hanging in the background as we look at UK monetary policy because today brings the monthly update on the labour market and in particular on average earnings or wages. With UK economic growth looking solid in 2015 then the Bank of England will have its nose to the ground on the subject of wage growth in the UK.
UK wage outlook
We have been update twice this week on the outlook for UK wages. The CIPD (Chartered Institute for Personnel and Development) offered what has become a familiar picture on Monday.

workers in occupations where there are skills or labour shortages and thriving sectors such as finance and construction seem likely to get pay increases well above current inflation. However, at the other end of the scale, many workers in areas such as manufacturing and public sector, are seeing only a very modest increase in living standards.  In between, the bulk of workers will continue to see moderate growth in their pay packets.

A typical increase is seen as being in the range 1% to 2% which is hardly the white heat of wage growth albeit that it does exceed official estimates of consumer inflation meaning that we have some real wage growth. However it too is welcome but thin.
A welcome piece of news in the CIPD report was that employers are looking to take on more young people (16-24) in the coming months. The optimistic view of that is that they are planning to invest in them and up skill whilst those of a more pessimistic nature might wonder if the upcoming living wage rules which have a lower level for under 25s have provoked a shift.
Resolution Foundation
They now publish a monthly update on what they think is happening on the wages front.

The analysis, which models recent labour market data to forecast short-term trends in regular (non-bonus) pay, predicts that average weekly earnings growth will stand somewhere between 2.7 and 2.8 per cent in the three months to June. That would leave it broadly in line with May’s figure of 2.8 per cent – which was the joint fastest level of real pay growth in eight years.

This is both simultaneously good and bad. The sunny side is that we seem to be sustaining solid wage growth which is pretty much real wage growth compared to official inflation and about 1% lower than that if you use the RPI. The cloudier theme comes if you consider how strong the quantity measures of the UK labour market have been and wonder if this is as good as it gets on this front. As we stand they are somewhat downbeat on prospects.

But the Foundation warns that pre-crisis earnings are unlikely to be restored before the end of the decade.

What about the official data?
They showed that the Resolution Foundation is a good guide to developments or at least it has been in a so far short life.

Comparing April to June 2015 with a year earlier, pay for employees in Great Britain increased by 2.4% including bonuses and by 2.8% excluding bonuses.

In real terms the numbers are still positive just not as good as last month.

Comparing the three months to June 2015 with the same period in 2014, real AWE (total pay) grew by 2.4%, compared with 3.3% in the three months to May.

If we look deeper into the data we see that for the single month of June total pay growth fell to 1.9% as weekly wages fell to £488 from the £492 of May. This can be an erratic series but it is hard to ignore an outright lower number which reduces the annual rate of growth.
What numbers should we use?
We need to use as many sources as possible as even the UK establishment seems to have lost a fair bit of faith in the statistics it produces. They have appointed a man who used to be Mr.Bean but is now Sir Charlie to look into them.

As an economy develops, the traditional ways of thinking about it cease to be so relevant,” he said, flagging concerns that official numbers may be incomplete in an internet age.

He feels that the numbers may have been relevant for the Great Depression of the last century but not now. I am very unclear where he is going with that as many of the numbers we use as much more recent developments. Perhaps he will discover that as he does his research.
However the fundamental point is that we are currently relying on numbers which are not especially reliable.
Employment and Unemployment
These have been strong over past couple of years or so but we are presently in the midst of something of a hiccup.

Comparing April to June 2015 with January to March 2015, the number of people in employment fell by 63,000 (to reach 31.03 million), the number of unemployed people increased by 25,000 (to reach 1.85 million).

So employment has fallen and unemployment risen albeit in small quantities compared to past gains. If we drill into the detail we see that unemployment rate rose in April (5.7%) and May (5.8%) before falling in June (5.5%). So perhaps a blip but we do know that so far the lowest level for the unemployment rate was February’s 5.4%.
Mark Carney
At this point it is hard not to think of his “sooner rather than later” statement with regards to Bank Rate rises with today’s headline numbers showing fading wage growth, a dip in employment and a rise in unemployment! Regular readers will know my thoughts on this front but is it rude to point out this piece of research from the Bank of England? The emphasis is mine

In this post, we show an estimate derived from a standard macroeconomic model which suggests that the (real) natural rate fell very sharply during the financial crisis, perhaps to as low as -6%, and that, despite a marked recovery since 2012, it remains around zero.

David Miles
David gave something of a valedictory interview to Bloomberg earlier this week and told us this.

David Miles said there was a “reasonable” argument for the Bank of England to raise interest rates at its meeting last week

As he was someone who voted for more QE just as the UK boomlet began it may be possible or even probable that David has topped and tailed things and certainly does not live up to the lyrics of Pete Townsend.

I can see for miles and miles and miles and miles and miles
Oh yeah

China Crisis
Whilst this something which is only two days old it has reverberated around financial markets as they quickly switched from “move along nothing to see here” to some significant changes. For example the modern safe haven of Germany’s two-year bond yield has fallen to -0.29% which is a new record low. Also I note that the Rupee of India is being hit as we consider the impact on emerging markets. If we consider that this could be quite an exporting of deflation then you might like to consider this from the July MPC Minutes.

For these members, the uncertainty caused by recent developments in Greece was a very material factor in their decisions:

If they thought that about Greece which is only around 2% of the Euro area what might they do following a genuine China Crisis.
As to today’s devaluation then our musical accompaniment comes from Britney Spears.

Hit me baby one more time

And Carly Simon

Its coming around again

Comment
Individual labour market reports can be misleading but we see that the UK numbers are maybe signalling something of a peak is happening now or in the case of unemployment has happened. Also as a counterpoint to the wage growth numbers it appears that productivity has improved as we have higher output with lower labour input. So even before we get to worries about China the Bank Rate hike may well be fading and find itself replaced by thoughts as to how close to 0% the statement below is?

it remains around zero.

Should it turn out to be 0% then Mark Carney will be below his lower bound of 0.5%. Perhaps he might contact the Riksbank of Sweden? Also he might want to avoid those who have followed his advice and fixed their mortgage rate.