British rate rise prospect cools, pound falls

GMT 20:57 2014 Wednesday ,13 August

Arab Today, arab today British rate rise prospect cools, pound falls

Bank of England Governor Mark Carney
London - AFP

 The Bank of England hinted Wednesday that a rate rise might have to wait while pay lags behind a robust recovery of the economy, taking the steam out of sterling.
The BoE also revised its 2015 growth forecast slightly higher.
But despite recent solid economic growth figures for Britain, there are increasing signs that wages will grow at a slower rate than inflation.
That in turn could cause the Bank of England to wait until next year before raising its record-low interest rates.
The firm growth trend in Britain, a member of the European Union but not of the eurozone, contrasts with the neighbouring eurozone climate.
Germany with the biggest eurozone economy is slowing down and could report a blip of slight second-quarter economic decline on Thursday.
France with the second-biggest economy, is in a grim struggle to reform and analysts say it could report zero growth for the quarter. Last week, Italy, ranking number three, slipped back into recession.
Speculation that the BoE would raise its key interest rate from its current 0.5-percent level before the end of 2014 has helped boost the pound in recent months.
- Sterling falls -
But traders rushed to sell sterling on Wednesday as prospects of a rate increase this year receded owing to the central bank's revised forecast.
"A significant cut to the Bank of England's wage growth forecast saw sterling crash to a more than two month low against the US dollar," said Craig Erlam, market analyst at Alpari traders.
"Traders took the revision to mean that the central bank won't raise rates this year, pushing back some forecasts to the start of 2015."
The BoE, led by Canadian Mark Carney, lowered its forecast for wages growth this year to just 1.25 percent from an estimate of 2.5 percent given in May.
British annual inflation stands at 1.9 percent, just under the BoE's 2.0-percent target rate.
Carney referred to "relatively unprecedented weak wage growth" in Britain as he delivered the central bank's latest quarterly economic forecasts.
He added that moving forward, the bank's MPC rate-setting committee "will be placing particular importance on the prospective paths for wages and unit labour costs".
But Carney cautioned: "To be clear, the MPC does not have a particular threshold for wage growth, rather we will continue to monitor a broad range of data to assess overall inflationary pressures and the timing of the first (rate) increase."
- Unemployment falls -
Official data on Wednesday showed that the unemployment rate fell to 6.4 percent in the quarter to the end of June, the lowest level for more than five years.
The rate for the April-June period compares with 6.5 percent for the three months to the end of May, the Office for National Statistics said in a statement.
Markets have been betting on the possibility of a 2014 change to the BoE lending rate for the first time in more than five years as unemployment falls faster than expected ahead of next year's general election.
The key rate was lowered to 0.5 percent in March 2009 in a move aimed at dragging Britain out of recession fueled by the global financial crisis.
The central bank also raised its forecast for British economic growth next year to 3.0 percent from a previous estimate of 2.9 percent.
But it downgraded its forecast for 2016 to 2.6 percent from 2.8 percent.
In the second quarter of this year, Britain's economy grew strongly to become larger than before the financial crisis.
Gross domestic product (GDP) expanded by 0.8 percent between April and June from the first quarter, when it grew by the same amount.
At Berenberg bank, economist Robert Wood commented that "the strange disconnect between pay and unemployment continued".
The bank was likely to raise its rate in November, but "continued weak wage growth raises the risk that the BoE will wait until next year," Wood said.


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