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April 23, 2014 10:43 am
The Bank of England has raised its estimate of first-quarter growth to 1 per cent, after a run of positive data suggested the economic recovery is strengthening.
The minutes of the last meeting of the rate-setting Monetary Policy Committee highlight strong industrial production, household spending growth, positive business survey signals and easing credit conditions as the main reasons behind the upgrade.
The meeting was held before the UK’s unemployment rate fell below 7 per cent and under the old forward guidance framework the committee would not consider raising rates until that threshold was breached.
As expected, the MPC members voted unanimously to keep interest rates on hold at 0.5 per cent and maintain asset purchases at £375bn.
Next month’s meeting will be held under the second phase of forward guidance, where the BoE will monitor a range of indicators of slack in the economy and look to ensure spare capacity is absorbed before raising rates.
As such, the judgments of individual members about the level of slack – how much room there is for people to work more without stoking inflationary wage pressures – will become increasingly important.
The minutes report a “range of views” about whether this was understated by measured unemployment. In particular, whether the striking rise in self-employment could be evidence of underemployment, or a long-term trend in a changing jobs market. Self-employment has accounted for almost half of the rise in employment since 2010.
Analyst Luke Bartholomew, of Aberdeen Asset Management, said the fact the meeting was cut short so some members could attend the International Monetary Fund spring meetings in Washington was “hardly suggestive of an agenda packed full of controversial debates”.
He added: “They acknowledged there was a range of views about slack, and I think in the next few months [we will see] some of the members will start peeling away from the consensus and seeing some dissent.”
The committee also pointed to signs of a “building momentum in pay”, but warned of a risk to inflation if wage growth was to accelerate without an equivalent pick up in productivity.
Rob Wood, chief UK economist at Berenberg bank, said this consideration was important, as “underemployment and weak wage growth are perhaps the two remaining factors that could delay a rate hike until well into 2015”.
“The economy appears to be booming right now, which, in our view, is likely to mean further tightening in the labour market and easing downward pressure on wages and inflation next year. We expect at least one of the rate setters to be voting for a rate hike by late summer,” he added.
The summary of business conditions from the BoE’s agents, who monitor economic conditions in 12 regional locations in the UK, point to an uptick in hiring intentions as companies become more confident in the economic recovery. But it says intentions were generally growing at a lower rate than output, “suggesting some expected improvement in productivity”.
The agents report recruitment difficulties “marginally above normal” with skill shortages most evident within IT, engineering, haulage and construction, but broadening to other areas.
On pay, the report notes “continuing reports of companies having to pay more than expected to recruit new staff or retain key skills”, although pay settlements on the whole remained subdued.
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