LONDON (Reuters Breakingviews) - Bank of England Governor Mark Carney has struggled to shake off the “unreliable boyfriend” epithet coined by a British lawmaker. While the central banker has gone back on his word in the past, he can’t be blamed this time if his message is misunderstood.
The UK central bank left its official interest rate at 0.5 percent on Thursday and issued a quarterly report in which it trimmed its growth and inflation forecasts for the year. The pound fell sharply, and money market traders now doubt that there will be a rate rise this year. Such scepticism may be overdone.
Carney repeatedly stressed on Thursday that the UK economy doesn’t have to grow very fast to generate price pressures. And while the inflationary impact of sterling’s past depreciation is waning, there’s a rising risk of home-grown price pressures, which the central bank is more apt to worry about than those caused by one-off shocks to the exchange rate.
For one thing, the UK labour market has very little slack. The UK jobless rate has fallen to 4.2 percent, its lowest since 1975; the employment rate is at its highest on record; and there has been a rise in the number of vacancies relative to the size of the workforce. True, the proportion of people who have part-time jobs but would like full-time ones is higher than it was before the financial crisis. However, the share of those not currently looking for a job but who would like one has also been falling for most of the past two years. All of which suggests that wage pressures will continue to grow.
There are a couple of caveats. Carney will want to see if a pronounced weakening in growth in the first quarter, possibly caused by unusually cold weather, was temporary and whether consumer credit growth bounces back after slowing in March. It’s also not clear whether households will rebuild savings, which they have dipped into over the past two years to make up for the hit to real wages caused by imported inflation. But these are not reasons to rule out a rate rise so early in the year. Traders seem to have adopted an all-or-nothing approach to UK rate rises. Carney cannot carry the can for their oscillations.
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