Britain’s unemployment rate unexpectedly rose for the first time since 2013 in the three months to May. The UK labour market statistics showed that wage growth accelerated a bit further in May. Average weekly earnings excluding bonuses (three-month average) increased to 2.8% y/y in May from 2.7% y/y in April. Wage growth is at its highest level since February 2009. The Bank of England is keeping a close eye on wages as it considers when to start raising interest rates from their record low of 0.5 percent. BoE Governor Mark Carney last week said that earnings data up to April had been a touch firmer than the central bank expected.The UK CPI remained unchanged in June against the expectation of a 0.1% rise. The combination of rising wage growth and very low inflation implies increasing real wage growth, which is at its highest level since September 2007. The inflation is mainly low due to the drop in energy and food prices, this supports the private consumption and thus the UK recovery.Despite the higher unemployment rate and lower employment it is worth noting that the UK labour market is still more or less back to ‘normal’ as Bank of England estimates that the medium-term equilibrium unemployment rate is around 5.5%. In other words, the slack in the labour market has diminished of which the accelerating wage growth is also a sign. Bank of England governor Mark Carney said last week that the first Bank Rate hike ‘is moving closer’. Mark Carney said something similar last year but the economy is in much better shape now. David Miles, who is considered as one of the doves, said in a speech yesterday that the ‘first move up in Bank Rate soon is likely to be right’. The comments indicate that the first hike is impending and supports that the Bank of England will hike at the November/February meeting.“BoE policy expectations have firmed, recovering from their recent decline to price a roughly 65% chance of a 25bpt rate hike over the next 12 months”. says Scotiabank in a reportThe minutes from the last MPC meeting in July are due for release next week. The vote count is expected to be unchanged at 9-0. Comments on the increasing wage growth will likely attract attention as wage growth has outpaced the projection from the last Inflation Report in May.“We still expect Bank of England to hike rates in November this year as the medium-term inflation outlook still calls for tighter monetary policy. Low core inflation, strong GBP and the timing of the first Fed hike present downside risks to our call, as they imply that the MPC may be more patient with the bank’s first rate hike”, says Dankse Bank. Sterling was flat against the dollar at $1.5590 on Monday. Against the euro it was a third of a percent weaker at 69.62 pence, but still close to a 7-1/2-year peak of 69.35 pence touched on Friday.“We would look for a hawkish slant and movement from traditionally more dovish BoE members towards the hawks (which) could spur additional sterling-positive rises in interest rate expectations.” – said Citi strategists
The material has been provided by InstaForex Company – www.instaforex.com