Pay growth revives hopes that UK casting off crisis hangover
LONDON – British workers’ pay grew at its fastest rate in nearly four years in the three months to April, putting the prospect of the Bank of England finally raising interest rates firmly back on the agenda for investors.
A long-awaited recovery in living standards seemed to be gathering momentum as a key measure of earnings rose more quickly than expected, official data showed on Wednesday.
Sterling hit its highest level in a month against the US dollar GBP=. Bond investors brought forward their bets on a first rate rise, with an outside chance it could happen later this year.
Combined with near-zero inflation and data showing an increase in foreign direct investment, the earnings numbers suggested Britain’s economy was picking up momentum again after growth slowed at the start of the year.
The Office for National Statistics said total average weekly earnings in the three months to April, including bonuses, rose by 2.7 percent compared with the same period a year earlier.
That was the strongest increase since the summer of 2011.
Excluding bonuses, the increase in pay was the strongest since early 2009, when the financial crisis was raging.
Economists said the figures probably took the Bank of England by surprise. Last month, it cut its forecast for annual wage growth in the last three months of 2015 to 2.5 percent from a previous forecast of 3.5 percent, as it lowered its overall growth outlook for Britain.
“That seems to have been a case of unfortunate timing,” Alan Clarke, an economist with Scotiabank, said. “There are clearly signs of wages starting to pick up and we should be able to hit 3 percent around the end of the year. Wages are no longer an obstruction to a rate hike.”
CHANGING MOOD AT BOE?
The BoE said on Wednesday its nine interest rate-setters all voted earlier this month to keep borrowing costs at their record low, where they have sat since early 2009. But two members of the committee again described their decision as “finely balanced”.
Sam Hill, an economist at RBC, said there was a chance that more than two policymakers could soon be tempted to vote for rate hikes, especially if a recent recovery in fuel prices continues to push up inflation further away from zero.
Martin Weale and Ian McCafferty voted for a rate rise in late 2014 before dropping that call in January as oil prices plunged.
But the BoE would want to be sure that the step-up in pay growth was not a blip and it would be reluctant to raise rates ahead of the U.S. Federal Reserve, which could push up sterling, said Elizabeth Martins, an economist at HSBC.
Britain is also girding for possible fallout from Greece‘s debt showdown. The government is speeding up preparations for a possible Greek exit from the euro zone, a spokeswoman for Prime Minister David Cameron said.
The ONS said on Wednesday that Britain’s unemployment rate held stable at 5.5 percent in the three months to April, holding at its lowest level since 2008.
A surge in jobs growth had lost some steam ahead of Britain’s national election last month. Uncertainty for employers lifted when Cameron’s Conservative Party won an outright parliamentary majority in May, defying poll predictions of an inconclusive result.
Some companies are now concerned that his plan to hold an in-out referendum on Britain’s membership of the European Union by the end of 2017 represents a new element of uncertainty.
Last week, ratings agency Standard & Poor’s said it could cut Britain’s AAA rating because of the risk of an EU exit.
Possibly seeking to counter those concerns, Cameron announced on Wednesday that the total value of foreign direct investment in Britain had topped 1 trillion pounds ($1.57 trillion) for the first time. –Reuters