British rate rise prospect cools, pound falls as wages lag

13th August 2014, Comments 0 comments

The Bank of England lowered its forecast for wages growth in Britain on Wednesday, placing a dampener on news of a further drop in unemployment.

The bank edged up its growth forecast for 2015, but despite recent solid economic growth figures for Britain, there are increasing signs that wage growth will lag inflation.

That in turn could cause the Bank of England to wait until next year before moving to raise record-low interest rates.

However, the firm growth trend in Britain, a member of the European Union but not of the eurozone, contrasts with the eurozone climate.

Germany with the biggest eurozone economy is slowing down and may report a blip of slight second-quarter shrinkage of the economy on Thursday.

France with the second-biggest economy, is in a grim struggle to reform and analysts say it could report zero growth for the quarter. Last week, Italy, ranking number three, slipped back into recession.

Speculation that the BoE would raise its key interest rate from its current 0.5-percent level before the end of 2014 has helped to boost the pound in recent months.

- Sterling falls -

But traders rushed to sell sterling on Wednesday as prospects of a rate increase this year receded following the central bank's revised forecast.

"A significant cut to the Bank of England's wage growth forecast saw sterling crash to a more than two month low against the US dollar," said Craig Erlam, market analyst at Alpari traders.

This was because "traders took the revision to mean that the central bank won't raise rates this year, pushing back some forecasts to the start of 2015."

The BoE, led by Canadian Mark Carney, lowered its forecast for wages growth this year to just 1.25 percent from an estimate of 2.5 percent given in May.

British annual inflation stands at 1.9 percent, just under the BoE's 2.0-percent target rate.

Carney referred to "a relatively unprecedented weak wage growth" in Britain, as he delivered the central bank's latest quarterly economic forecasts.

He added that moving forward, the bank's MPC rate-setting committee "will be placing particular importance on the prospective paths for wages and unit labour costs".

But Carney cautioned: "To be clear, the MPC does not have a particular threshold for wage growth, rather we will continue to monitor a broad range of data to assess overall inflationary pressures and the timing of the first (rate) increase."

- Unemployment falls -

One such figure is the official monthly unemployment release, which showed on Wednesday that the unemployment rate fell to 6.4 percent in the quarter to the end of June, the lowest level for more than five years.

The rate for the April-June period compares with 6.5 percent for the three months to the end of May, the Office for National Statistics said in a statement.

The ONS added that the number of unemployed dropped by 132,000 to stand at 2.08 million people.

In recent months, markets have been betting on the possibility of a 2014 change to the BoE lending rate for the first time for more than five years as unemployment falls faster than expected ahead of next year's general election.

The key rate was lowered to 0.5 percent in March 2009 in a move aimed at dragging Britain out of recession caused by the global financial crisis which had erupted the previous year.

Also on Wednesday, the central bank raised its forecast for British economic growth next year to 3.0 percent from a previous estimate of 2.9 percent.

But it downgraded its forecast for 2016, to 2.6 percent from 2.8 percent.

In the second quarter of this year, Britain's economy grew strongly to become larger than before the financial crisis.

Gross domestic product (GDP) expanded by 0.8 percent between April and June from the first quarter, when it grew by the same amount, an initial official estimate showed. The second official estimate is due on Friday.

© 2014 AFP

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