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MPC at pains to understand slow wage growth, minutes show

- MPC mystified by slow wages and productivity growth
– Warns of further substantial GBP depreciation
– Official data ‘often misleading’ at economic turning points

The Monetary Policy Committee (MPC) is confident the current economic expansion in the UK will continue although it was at pains to understand under-performing measured labour productivity – arguably the most important variable in the outlook for its monetary policy.

That seems to be the gist of the minutes of its last policy meeting, on December 4th and 5th.

Perhaps the easiest explanation, and one that has caught some observers’ attention, is that estimates from the Office for National Statistics are understating current output levels and hence productivity.

That is a common enough occurrence at turning points in the economic cycle, the MPC explained in the minutes. Nevertheless, indications from surveys and extremely weak growth in real wages did not seem to square with that possibility.

In any case, contacts of the Bank’s agents continued to expect that some of the factors that had held back productivity would ease as the recovery continued. It was, however, too soon to draw firm conclusions on the responsiveness of effective supply to stronger demand, the MPC stated.

The central bank also said that it will be monitoring the annual pay agreements that take place in the first few months of the New Year, as they would provide the committee with an important reference point on the strength of pay pressure.

Also worth noting, Governor Mark Carney and his colleagues signalled that they were comfortable with the level of sterling, yet added: ‘any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery.’

Some analysts have been warning of late that levels in cable towards $1.65 or $1.70 would likely be rather provocative for the bank.

Linked to the above, the minutes pointed out that the sterling effective exchange rate index (a nominal trade weighted measure versus Britain’s main trading partners) had risen further, by around 2% on the month, and now stood close to the top of the range it had occupied since early 2009.

The minutes seemed to put some emphasis on the fact that no threats to financial stability were apparently looming anywhere on the horizon.

Regarding the recent strong growth figures for the UK the monetary authority emphasised how the contribution from stock-building had been offset by a large drag from net trade. In its opinion that showed how difficult it would be to rebalance the expansion away from internal demand given the weakness in the country’s main trading partners.

Furthermore, while investment had been weaker than forecast the data were prone to revisions and ‘there had been recent signs that a recovery in business investment might be underway.’

The backdrop for policymakers’ deliberations was one of moderate expansion Stateside, weak growth in the Eurozone and a somewhat mixed outlook in Asia, alongside divergences in expectations for monetary policy between the US, the Eurozone and Britain. Lastly, the bank called attention to the low inflation readings globally, including the drift lower in core prices observed over the last year, possibly as a result of current levels of slack.


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