Carney's Rate Dilemma No Easier as Inflation Rears Up Again (1)

Sep 14, 2017 4:10 am ET

(Bloomberg) -- The Bank of England’s Monetary Policy Committee is grappling with a familiar trade-off and something might have to give soon.

The U.K.’s inflation rate is on the rise again -- nearing a five-year high last month -- while wage growth remains stubbornly low, hurting consumers. That’s sharpening the dilemma Governor Mark Carney and fellow policy makers face as they try to assess whether they need to begin unwinding some of the Brexit stimulus they put in place last year.

While pay increases remain subdued, unemployment keeps falling, which means a tighter labor market and the potential for stronger domestic price pressures. Along with the latest inflation figure, already above the central bank’s 2 percent goal, that may strengthen the view of the hawks that it’s time to get ahead of the curve.

“We still lean towards the view that the Bank of England will hold off from raising interest rates until late-2018 -- but a move before then is looking a closer call,” said EY Item Club chief economist Howard Archer.

Most economists expect the nine-member MPC to vote 7-2 to keep the benchmark rate at 0.25 percent, though there’s a chance of 6-3. Chief Economist Andy Haldane is seen as a candidate to side Michael Saunders and Ian McCafferty in voting for a hike.

“There’s certainly a fair chance that Haldane joins the hawks,” John Wraith, head of U.K. Rates Strategy at UBS, said in a Bloomberg Television interview. “That said, he was certainly worried about the lack of wage inflation -- he went to great lengths to explain why he thought it hadn’t come through -- and as we sit here it still hasn’t.”

The wage-inflation issue has divided the MPC for months, with positions hardening early this year until dissenting votes began to emerge in March. Three people also voted for a rate increase in June, before Kristin Forbes stepped down at the end of her term.

For investors, the prospect of BOE tightening early next year increased after inflation picked up to 2.9 percent in August. Traders are now pricing in about an 80 percent chance of a February move, up from 44 percent last week, based on Sonia forward rates.

Yet economists predict that for the majority of BOE policy makers, subdued demand and the precarious outlook for consumers mean Thursday is probably too early to take any dramatic steps.

“Sluggish wage growth and a lack of evidence that the economy is rebalancing should be enough to keep the majority of policy makers voting for no change,” Bloomberg Intelligence economists Dan Hanson and Jamie Murray wrote in a note.

(Updates with rate bets, comment from economist starting in sixth paragraph.)

--With assistance from Lucy Meakin Guy Johnson and Stephen Spratt

©2017 Bloomberg L.P.