The Bank of England announced this morning the inflation rate is down from 2.6% to 2.2%. Forward Guidance is proving a bit tricky for BOE Governor Carney as predictions on improving in inflation, unemployment, and interest rates are happening much faster than the Bank indicated only a few weeks ago.
At a media briefing this morning the Governor explained that UK inflation is now as low as it has been since 2009. Jobs are being created at a rate of 60,000 per month and the economy is growing at its fastest pace in 6 years.
However, he was quick to sound a note of caution stating that nearly one million more people are out of work than in the years before the financial crisis. With wages increasing at only 30% of the reduced inflation rate of 2.2% (down from 2.6%) the cost of living issue will continue to be a concern.
The Governor went on to say, “A strong and sustained recovery is needed to put people back in work and use up the slack in the economy.”
It seems that the MPC now expects the 7% unemployment threshold to be reached earlier than previously predicted. But with a lot of slack in the system with respect to labour, wages will still remain under pressure.
This is not a scenario that Chancellor Osborne will want in the run up to an election so continue to expect low interest rates for the time being as inflation subdues and wages gradually strengthen. The cross over point when wage inflation begins to exceed RPI could be an interesting trigger point and will likely cue a change in rates upwards.
Low UK inflation is good news for the Channel Islands because we import most of our goods via the UK. Upward interest rate movements will also be good for our finance industry as the deposits which are garnered from all over the world begin to deliver a better return alleviating what banker’s call margin compression. In simple terms if rates are very low the margin between what you pay to depositors and receive from borrowers is small, depressing profits.
When rates go up profits should improve, which should boost employment and tax receipts. 2014 is looking more and more likely in terms of the first move but much will depend on whether the current recovery continues to strengthen.