Over the weekend in an interview with the Sunday Times Bank of England Governor Mark Carney said that policymakers would not necessarily wait for ‘real wages’ to rise before hiking interest rates.
Sterling plunged lower against all of its most-traded currency peers last Wednesday when Carney intimated that the pace of wage growth was to be the most important factor in future BoE decisions on the path of UK interest rates.
Carney’s comments during Wednesday’s quarterly inflation report came shortly after British average earnings had printed at -0.2% – its lowest level since 2009. And subsequently demand for Sterling stumped across the board, leading to a number of monthly lows in key currency pairs.
With the Pound falling below important technical trading barriers at 1.25 against the Euro and 1.67 against the US Dollar it looked likely that Sterling could suffer further depreciations in the near term.
However, the BoE Governor could have thrown Sterling a lifeline on Sunday when he said that interest rates could rise before wage growth actually overtakes inflation.
Carney said that ‘real wages’ (the rate of wage growth minus the rate of inflation) would not necessarily have to be in positive territory for the bank to consider hiking the benchmark interest rate:
‘We have to have the confidence that real wages are going to be growing sustainably (before rates go up). We don’t have to wait for the fact of that turn to do so’.
This had a positive impact on BoE rate hike projections and also had a similarly bullish impact on the Pound Sterling.
Following last week’s quarterly inflation report it seems likely that the BoE will wait until February next year to begin its hiking cycle, but there had been dark mutterings from some analysts suggesting that rates could even remain on hold until May, or even later, due to Britain’s weak outlook for wage growth.
Carney’s latest remarks add weight to the argument for a rate hike in February, and this could take a little pressure off the Pound from those who had been fearful of a longer period of rock-bottom interest rates.
The Governor also stated that he would be ‘comfortable’ being the first of the big four central banks (the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan) to start tightening monetary policy following the financial crisis.
The most important events to look out for on the economic calendar this week are Tuesday’s UK consumer price index inflation data, Wednesday’s Bank of England minutes report and Thursday’s British retail sales report.
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