The pound has fallen further as the Bank of England slashed projections for wage growth, signalling an interest rate rise would likely be delayed until early next year.
The Bank has cut its forecasts for 2014 wage growth to just 1.25% in its quarterly inflation report, down from 2.5% in May, and emphasised the importance weak wages would play in its monitoring of inflation.
‘The strength in labour market quantities has contrasted with the weakness of wage growth, increasing the uncertainty about the current degree of spare capacity,’ it said in its report.
‘In light of [this uncertainty], the committee noted the importance of monitoring the expected path of costs, particularly wages, in assessing inflationary pressures.’
The Bank also lowered its inflation forecast for two years ahead, from 1.9% to 1.8%, even while it nudged up its forecast for UK economic growth in 2014 from 3.4% to 3.5%.
The pound, already down in the morning’s trading after fresh data showed UK wages had fallen compared to last year, fell further as the prospects of an interest rate rise receded, to $1.6721.
Chris Williamson, chief economist at Markit, said an interest rate rise this year now looked less likely. ‘Such weak pay growth adds to the sense that any first rate rise will be delayed until early next year,’ he said.
‘The report and recent rhetoric from policymakers gives the impression that rates will not rise until wage growth is showing clear signs of picking up.
‘While it seems likely that calls to raise interest rates will start to gather strength in coming months, a majority vote for a rate rise still looks some way off.’
The FTSE 100 received a boost from the weakness of sterling, as companies on the index derive around three-quarters of their revenue from outside the UK.
House builders, which have benefited from historically low interest rates, traded higher on hopes rates would not be hiked this year. Barratt Developments (BDEV) rose 2.1% to 348.2p while Persimmon (PSN) edged up 1% to £12.89.
G4S (GFS) extended gains on news the outsourcing firm was in talks with a potential buyer of its US government solutions business, up 2.4% at 266p.
Miners meanwhile remained in the doldrums on weak data from top metals consumer China.
Pound follows UK wages down
(10:20) The pound has dropped as fresh employment data revealed UK wages have fallen compared to last year, in spite of improving jobs numbers.
Sterling fell to a low of $1.6794 on the news, before recovering to $1.6801 as Office for National Statistics figures showed average wage growth fell 0.2% year-on-year over the three months to the end of June, a worse drop than had been expected. However, once bonuses are stripped out, wages rose 0.6% over the period.
The ONS figures also showed 167,000 jobs were added in June, below expectations of a 270,000 rise, while the unemployment rate dipped from 6.5% to 6.4%.
ING economist James Knightley said the fall in wages highlighted ‘the lack of inflationary pressures emanating from the labour market despite robust jobs growth’.
The lack of wage growth could shift the balance towards an interest rate rise by the Bank of England in early 2015 rather than later this year. Governor Mark Carney is set to give a press conference following the publication of the Bank’s quarterly inflation report later this morning.
Sterling’s falls helped the FTSE 100, as companies on the index derive around 75% of their revenues from outside the UK. The UK blue-chip index edged two points higher to 6,634.
Weak data from top metals consumer China meanwhile weighed on mining stocks in the index. Figures for money supply, industrial production activity and retail sales growth were all below expectations.
Rio Tinto (RIO) fell 2.8% to £34.17, Glencore (GLEN) dropped 2.5% to 365.8p, Anglo American (AAL) shed 0.6% to £15.76, BHP Billiton (BLT) traded 0.5% lower at £20.24 while Antofagasta (ANTO) dipped 0.5% to 817p.
Prudential (PRU) continued to make gains after positive first-half results announced yesterday, rising 1.9% to £13.95.
G4S (GFS) rose 1.5% to 263.3p on news the outsourcing firm was in talks with a potential buyer of its US government solutions business.
Japan meanwhile reported a 6.8% contraction in gross domestic product in the second quarter of the year, the biggest decline since the tsunami hit in 2011. However, the fall was better than the 7% drop investors had expected, and Japan’s Topix index edged higher.