Bank of England bosses say wage data is “key” for next interest rate rise but markets are now in line
Markets have woken up to data showing rising inflationary pressures from wage growth and expectations of interest rate rises are now in line with what the Bank of England forecasts, according to governor Mark Carney.
The Bank today reiterated its message from a fortnight ago that interest rates will have to rise sooner and faster than than markets had expected in February.
The rate-setting monetary policy committee (MPC) gave a clear hawkish signal at its last meeting that market expectations were not taking into account building inflationary pressures shown in economic data.
Read more: Bank of England signals markets to expect earlier interest rate hike
Speaking to MPs on the Treasury Select Committee today, Carney said that “financial markets have started to move with the underlying data”, with the path for rates implied by markets reflecting the Bank’s inflation forecasts.
The rise in domestic inflationary pressures which prompted the hawkish turn means data releases on wages for January to March will be “key”, said Andy Haldane, the Bank’s chief economist.
Haldane said an increase to annual wage growth to above three per cent was “very likely” because of the comparison to a weak prior period.
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“The long-awaited pick-up in wages is starting to take root,” Haldane said.
Carney said the Phillips Curve, the theory that rising employment will raise wages, and thus inflation, is taking effect.
“It’s alive and well – which is part of the message,” he said.
Citing comments by former Federal Reserve chair Janet Yellen, who began a rate-hiking cycle before being replaced last month, Haldane said the Bank does not want to act too slowly to stifle inflation, and be forced into steeper, growth-damaging rate hikes at a later point.
“Recoveries don’t die of old age, they die because central banks step on them, because they react too late,” Haldane said.
Read more: Unemployment rises but wage growth accelerates