The Bank of England’s monetary policy committee voted 6 to 1 to raise interest rates by 0.25 percentage points to 4.75 per cent earlier this month, with newcomer David Blanchflower quick to establish his independent credentials by being the sole dissenter.
Minutes of the August meeting of the MPC showed that Mr Blanchflower voted for no change partly because he was concerned that rising unemployment and subdued wage inflation indicated there was more slack in the economy than credited by his colleagues.
However, labour market data also published on Wednesday offered Mr Blanchflower’s assessment mixed support. The Office for National Statistics said the International Labour Organisation’s measure of unemployment in the three months to June rose by 92,000 to 1.68m.
This pushed the unemployment rate to 5.5 per cent, up 0.3 per cent on the previous three months and the highest in six years. The number of people signing on for the jobseekers’ allowance, increased by 2,000 in July to stand at 957,000 and is inching closer to the politically sensitive 1 million mark.
But the number of people in jobs also climbed. The total employment level rose by 42,000 in the three months to June to 28.9m, the highest since such records began in 1971.
Furthermore, there are signs that better times for industry are being reflected in workers pay packets. The ONS said average earnings including bonuses rose by 4.3 in the quarter to June, up 0.2 percentage points on the May rate and a faster pace of increase than forecast by analysts.
This was driven by bonuses in the financial services sector and, perhaps more significantly, by a 5.9 per cent increase in the wages of manufacturing workers. The latter appears to confirm the Bank’s contention in its recently published quarterly inflation report that as the business environment improves for manufacturers they will seek to reward the labour force and push up prices, adding to inflationary pressures.
The Bank’s sensitivity to wages and inflationary expectations was highlighted in the minutes of August’s rate-setting meeting. One of the main reasons for deciding to deliver the unexpected hike two weeks ago was that it felt any delay might increase consumer’s inflation expectations “making it more difficult to bring inflation back to target subsequently.”
In addition it noted that the expected spike in inflation over the next six months would add to wage demands early next year.
“An early increase in rates would reduce the risk that a sharper rise would be needed later,” said the Bank.
John Butler at HSBC said, “The MPC clearly fear that near-term inflation will finally stoke up higher pay growth.”
Data out on Tuesday showed that annual consumer price inflation was 2.4 per cent in July. Though softer than the previous month’s reading of 2.5 per cent it was nevertheless the third consecutive month that inflation had been above the Bank’s 2 per cent target.
In its quarterly inflation report published a week ago, the Bank made clear it expected inflation would jump higher over the remaining months of the year. Mervyn King, Bank governor, admitted that there was a “50/50” chance he would have to write a letter to Gordon Brown in the next six months explaining why inflation had gone above 3 per cent.
