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

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


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.


18 thoughts on “Will the Bank of England now consider a Bank Rate cut?

  1. Shaun, great blog again and keep up the good work!
    I was trying to think of an instance when the B of E made a correct prediction, took a decision, which proved to be correct – I gave up, I only go back 40 years!

    • Hi Foxy and thank you.

      They have a chance this year to be correct about wage growth in the UK, however that is because they have changed their minds several times! So one of them has a fair chance of being right.

      Jokes aside there is a real issue with forecasting failure from an organisation which sets interest-rates on the basis of these mistakes. Of course the hype about Forward Guidance just makes it worse.

  2. Great column, Shaun, as usual.
    However, I would like to dispute one statement you made. “ 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.” You have made similar statements in other recent blogs: this is what real wage growth would be using the CPI as the deflator. We get something lower using the RPI as the deflator. Who’s to know which is better? The possibility of using the RPIJ as deflator isn’t mentioned at all.
    Let’s face it, the RPI is a discredited price indicator, with an inflationary bias, the formula effect, exceeding 0.5 percentage points. We can quibble about how the ONS chose to calculate RPI 2.0, the RPIJ series. I do that myself in my paper “Common Sense Favours the Use of the Jevons Formula”. However, on a take-it-or-leave-it basis there is absolutely no question that one should take the RPIJ series, not the RPI series, as the best deflator for earnings.
    In June CPI inflation was 0.0%, and RPI inflation 1.0%, but most of the difference between them was simply the formula effect, a consequence of the RPI’s dysfunctional use of the Carli formula in so many items, instead of the Jevons formula. RPIJ inflation was just 0.4%, and that’s the appropriate estimate to use to go from nominal earnings to earnings in constant pounds. In Paul Johnson’s dystopian vision of the future, the UK would use the CPIH for virtually everything including deflation of real earnings. The CPIH inflation rate was 0.3% in June, almost the same as the RPIJ inflation rate. However, you only have to go back to March 11 and the CPIH inflation rate is 1.0 percentage points lower than the RPI inflation rate. So it does make a BIG difference in general whether you use RPIJ or CPIH to deflate nominal earnings.
    You also mentioned Mr. Bean’s ongoing investigation of ONS statistics. I suspect that he will double down on the recommendations of the Johnson report, and try to make the CPIH the one index to rule them all. People who want to fight this dysfunctional initiative should say goodbye to the RPI, and welcome RPI 2.0, the RPIJ series.

    • Hi Andrew

      The truth is that all of the consumer inflation measures in the UK are flawed and the list of those that are discredited is long too! The UK debate has mostly been CPI versus RPI where CPI ignores the important housing market. When an official effort was made to put the housing sector in then they tied the efforts hands behind its back by using rents which have a very lagged response to changes. Even worse the rental series used failed.

      I know that you are a supported of RPIJ and I know that in the world of statistics you are far from alone. However if we move to the world of economics RPI continues to give answers nearer to what people think inflation is. From the latest Bank of England survey.

      “Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.2%, unchanged since February.”

      This is the question I have often asked at the RSS which goes along the lines of why is everybody wrong? Also I would add the sub plot now that by reducing the number in a disinflationary time it supports the case I think.

      Also on a simpler point I quote CPI and RPI as the polar extremes for the UK.

      However please keep making the case for RPIJ as I know that many people read this blog because of the quality of the comments and replies and enjoy the discussion

      • Thank you for your reply. I appreciate the opportunity to express my views on your blog. While I take your point about looking at the range of inflation rates that one might use to adjust nominal wages, I don’t believe that range should include the RPI. It’s no longer a national statistic, and quite properly so. This is what the 2009 UNECE Practical Guide to Calculating Consumer Price Indices had to say on the subject: “The Carli (a simple arithmetic average of price relatives) and Dutot (the ratio of simple arithmetic averages of prices)formulae have a number of problems associated with their use – PARTICULARLY THE CARLI, WHICH IS POSITIVELY DISCOURAGED AS IT IS PARTICULARLY ASSOCIATED WITH SOME BAD CHARACTERISTICS.” (Emphasis added.) Not one country in the G-8 still uses the Carli formula to any extent. So whether one looks at official designations, the guidelines of international manuals or international practice of the countries to which the UK normally compares itself, the RPI no longer matters. Its place has been taken by the RPIJ. I still look at RPI series much more than I would like to, but that’s only because ONS doesn’t release component detail for the RPIJ.
        Why people in the UK perceive inflation as being much higher than the official estimates of it was the subject of an excellent paper by Jim O’Donoghue of the ONS: “Inflation _ Experience and Perceptions”. One point that he makes is that household perceptions tend to be shaped by the inflation rate for frequently purchased items, which usually exceeds the overall inflation rate. In any case, this is a separate issue, and shouldn’t be conflated with the issue of whether the RPI or the RPIJ is the better measure of inflation. If the people of the UK think the inflation rate is more than double what the RPI is showing, and more than four times what the RPIJ is showing, their perceptions or misperceptions of inflation don’t seem to be based on either series.

  3. Hi Shaun,

    Excellent blog.

    You could well be right on where BOE interests go next. Only yesterday I saw a good indication of this where the BBC website had an article on how householders should be preparing themselves for an imminent rate rise.

    A slowing of growth, wage rises and a slight increase in unemployment suggest that the economic headwinds are getting stronger.

    Where an economic cycle is on average 69 months, we have been through the contraction, recession and recovery phases, although some things like housing have recovered more than others like disposable incomes, and we are currently in the expansion phase. This suggests the next move in either the tail end of 2015 or the 1st half of 2016 will be a slowing of growth and maybe even a slight contraction. I think with the current glut of oil and gas and prices still heading south it will be a mild one, but it is unlikely that the BOE will want to raise interest rates if there are such economic headwinds. The best indicator that we are in a slowdown based on their recent track record and response times will be if the ECB slash QE and lift their base rate over the next 6 months or so!

    IMO what the Fed does over the next few months and what happens in China will have a bearing on the UK and interest rate policy, but Greece is a sideshow (choose who in the Greek government / Troka plays sideshow Bob best?) and are a useful scapegoat when the BOE economic model spews out predictions and forward guidance and they are proved yet again to be wrong!

    • Hi Rods

      Yes the official advice to remortgage may be regretted by those who took advantage of it. Those who hang on for a week or two may get some better deals as the China crisis has pushed bond yields lower and the UK 5 year Gilt has dropped to 1.38%. Should it really carry on then we may be due a “surprise”.

      I like the Sideshow Bob analogy didn’t Frasier Crane take the role from his brother Niles?

      As to times up I recall Jim Rickards making a similar point about the next recession being on the horizon if history is any guide

  4. Hi Shaun

    You may well be right about the next move in IRs; this is something you’ve been suggesting for some time but one has to ask the question: why bother? We are so near to zero is a quarter point reduction going to rescue us from the headwinds and cumulative misallocations of the past few years, let alone the potential onset of reduced growth or even recession? I can’t see it.

    It seems to me in truth that the CBs shot their bolt years ago and, in reality, have no ammunition left apart from QE which is very dubious to say the least. These events (China, Greece et al) may be the harbinger of the “chickens coming home to roost” in which case a quarter point won’t cut it at all.

    • Hi Bob J

      Well there is the example of the Riksbank in Sweden at -0.35% or the Danes or Swiss at -0.75%. Actually I think that we are in a zone where the economic impact is minor at best and may even be adverse. However central bankers want to demonstrate that they are not “maxxed out” to coin a phrase and will continue to play their games. In essence it was become a Public Relations game.

    • Hi therrawbuzzin

      I note that the article only refers to the gains in bond yields and the original Halle paper puts it thus.

      “One, in crisis times investors disproportionately seek out safe investments (“flight to safety”), bidding down the returns on safe-haven assets. We show that German bunds strongly benefited from this effect during the Greek debt crisis. Second, while the European Central Bank (ECB) monetary policy stance was quite close to an “optimal” monetary policy stance for Germany from 1999 to 2007, during the crisis monetary policy was too accommodating from a German
      perspective, due to the emerging disparities across the Euro area. As a result of these two effects, our calculations suggest that the German sovereign saved more than 100 billion Euros in interest expenses between 2010 and mid-2015. ”

      What is missing is an estimate of how much Germany has gained from a lower exchange rate in the Euro crisis period. The behaviour of the Swiss Franc shows us that this gain could be quite a bit larger.

  5. “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.”

    Are these pay figures gross or net? Obviously its the latter which people actually use as the basis for their spending decisions. My net gross pay is almost unchanged over the last six years but the company pension scheme i’m in has jacked up the contribution rate from 1.5% to 10% (as well as cutting the benefits I might add). Also there has been a further adverse effect on pay due to tax/National Insurance changes and there’s another increase in NI next year when we lose the contracted out rebate. Factoring pension and tax charges means my tax home pay after inflation is currently significantly down over the last six years. I’m not sure then whether the official pay figures are factoring pension and tax in – i’m suspicious because generally any figures quoted by government have been deliberately chosen to flatter economic performance.

    • Hi Redshift

      The numbers for the UK average earnings series are gross. More detail is provided here.


      They are an average of what is an increasingly disparate employed population and the ONS is churning out ever more research on this subject. As to your point about pensions then so many people are now paying more for promises of less and those who did not have one find themselves paying into the new national scheme. In both cases post pension contribution income now falls.

      Oh and the self-employed are ignore completely…

      • Thanks for the clarification Shaun. It validates my cynicism that any figures quoted by government or its agencies are selected to be flattering. I think the pensions issue is massively underestimated, especially in the way it may influence younger people’s spending decisions. I’m 49 and was having a chat in the office yesterday with a group of twenty somethings who are graduate entrants from the last few years. They’ve figured out they’re worse off by several hundred thousand pounds over a whole career here due to the combined effect of the large pension contributory rate they now have to pay, the increased age at which they will collect their company pension, the fact that its no longer a “final salary” scheme (instead its starting salary increased by at most the CPI rise over each year) and additionally that pension indexation after leaving the company is based on CPI rather than RPI. They were musing all manner of options such as emigration and being determined not to have any children so i’m guessing pension changes are going to to be an important factor in GDP performance going forward.

  6. I am not a statistician or an economist, as you can see by my previous comments! I do find the debate on which type inflation figure to use somewhat hypothetical. Inflation is a different thing to different people or organisations be pending on there income, expenditure and capital assets. To try and quantify a nations day to day inflation rate, I would suggest is virtually impossible, and can only ever be an vague indication. The gathering of data seems to be not much more than people buying a basket of goods from a supermarket, added to which are university fees and airline tickets! All that can be said that inflation general is very low/ negative, low,medium, high, very high and Zimbabwe.
    How a CB can ever expect to bring in measures to change a target, that probably will never exist, two years down the line, beats me.

  7. “Will the Bank of England now consider a Bank Rate cut?” – No, not unless there’s a lot more bad news than this and currently I don’t see the news getting anywhere near as bad as it would have to over the next 9 months.

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