UK Economy

Sluggish wage growth keeps pressure off the BoE for a rate hike

LONDON (Reuters) - Wage growth in Britain slowed in the three months to November even though unemployment fell to its lowest since early 2006, underlining why the Bank of England is saying it will take its time before raising interest rates.

City workers walk towards St Paul's Cathedral as they cross the Millennium footbridge during sunrise in central London, Britain January 14, 2016. REUTERS/Stefan Wermuth

Pay rises were the weakest since the three months to February, official data showed on Wednesday. Sterling nevertheless edged up as investors focused on strong job creation that took the unemployment rate to 5.1 percent.

The rapid fall in joblessness since 2013 has wrong footed the British central bank, which had expected wage growth to pick up more quickly than it has.

BoE Governor Mark Carney said on Tuesday that the Bank had no timetable for raising interest rates and that the level of unemployment at which wages become inflationary could be lower than previously thought.

The puzzlingly weak performance in pay has been linked to factors such as the strong flow of migrant workers coming to Britain and employees choosing to work fewer hours.

The BoE said on Wednesday that its regional agents, who speak regularly to businesses across the country, were also reporting that the plunge in inflation to below zero during 2015 was “mitigating upward pressures in pay for some companies”.

“This is the (BoE’s) key concern when it comes to wages and inflation as this relationship can become self reinforcing -- lower earnings drive lower inflation and vice versa,” said Kallum Pickering, an economist at Berenberg.

Workers’ total earnings including bonuses rose by 2.0 percent, slowing from 2.4 percent in the three months to October and slightly below the 2.1 percent forecast in a Reuters poll.

Earnings excluding bonuses were up 1.9 percent, a touch above the forecast in the poll but weaker than growth of 2.0 percent in the three months to October.

Some economists pointed to a pick-up in wage growth for November alone as an encouraging sign. But the 2.1 percent rise in earnings after bonuses during the month remained well below the 3.0 percent level that Carney has said he would like to see, among other factors, to make him think about a rate hike.

As well as wage growth, Carney said on Tuesday the BoE was looking for above-trend economic growth and a move in core inflation towards the Bank’s 2 percent inflation target before considering a rate hike.

Headline inflation has hovered near zero for months and weakness in the global economy is hurting British output.

The ONS said the number of people in employment leapt by 267,000, its third biggest increase since records began in 1971, taking the employment rate to a new high of 74.0 percent.

Editing by Catherine Evans