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MNI (London)
--Key Dividing Line For MPC In Aug Is Pay Outlook
--Public Sector Deals In Line With Haldane's Optimism
     LONDON (MNI) - The Bank of England Monetary Policy Committee (MPC) has been
divided over the outlook for earnings growth, but the public sector pay deals
announced Tuesday support BOE Chief Economist Andrew Haldane's upbeat view that
earnings are taking off.
     Haldane, who voted for a hike in June, will almost inevitably vote for a
hike at the August meeting, in part because of his belief that pay growth is
taking off. But Deputy Governor Jon Cunliffe, in June's no hike camp, has been
charier of tightening, arguing that it is unclear that pay growth will take
another step higher. 
     The latest data have offered something for both sides of the divide, with
whole economy average earnings growth decelerating but with public sector pay
set to head higher.
     "Pay growth has established itself in the 2.5-3% range. But the latest
readings do not signal strongly that pay growth will make the next step to
establish itself firmly in 3% territory in line with the May forecast. We may
still be underestimating supply in the labour market," Cunliffe said in a July
13 speech, making the case for "stodgy" monetary policy. 
     Cunliffe's argument on pay growth is certainly supported by recent official
and survey data. Survey data in the form of Xpert HR has shown since May, the
median pay award has been 2.5% for five consecutive months. ONS data from May
also showed pay dropping further from the illusive 3% mark. The annualised 3M/3M
private sector core earnings rate (a figure quoted by the BOE in the November
inflation report) whilst volatile, has shown a drop from the 3% territory since
last December. 
     However, the labour report on July 17 (four days after Cunliffe's speech)
showed his argument that supply is under-estimated could be limited. For
instance, the employment rate of 75.7% in May is a record high. This
corresponded with the lowest unemployment rate since 1975 and a record low
inactivity rate.  
     Haldane, in his June 28 speech, was altogether more upbeat. He noted that
private sector regular pay growth has risen from around 2% a year ago to just
shy of 3% and said that the government's 1% cap on public sector pay, which was
lifted last year, had put a brake on overall pay growth. 
     On Tuesday, the UK government announced a raft of pay increases ranging
from 2.0% to 3.5% with pay for about 40% of teachers set to rise in September by
3.5%, for armed forces by 2.9% and for 2.0% for police. These announcements were
pre-dated by a 3% across the board pay increase for National Health Service
(NHS) workers.
     Haldane in his speech said that "The lifting of the public pay cap for the
NHS could well have knock-on effects, not only to pay settlements elsewhere in
the public sector, but to private sector settlements too given the tightness of
the labour market. This will add to the gradual, but now clear, upwards impetus
to wage and cost pressures."
     Tuesday's news confirms his expectation of widespread increases in public
sector pay and he foresees this rise bolstering overall pay growth.
     In the August Inflation Report forecast round, the MPC will look again at
their earnings forecast, which in the May report was for 2.75% four quarter
earnings in Q4 this year and 3.25% in Q4 2019.
--MNI London Bureau; tel: +44 203-586-2225; email:
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MNI London Bureau | +44 203-865-3812 |