Weak labour market still concerning Bank of England’s MPC

23rd July 2014

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The Bank of England Monetary Policy Committee unanimously voted to keep interest rates on hold, the latest minutes show.

All nine members voted to keep rates at 0.5% amid concerns that while employment had continued to grow, wage growth had been “surprisingly weak”.

The MPC noted that wage growth excluding bonuses slowed to a record low 0.7% in the three months to May adding that changes to the benefits system and an increase in people working past retirement age had increased the supply of labour – keeping the cost of labour down. It added that recent job creation has been concentrated in low skilled, low paid jobs.

In addition, the committee also believes there might be a “modest slowing in output growth” in the second half of the year.

The minutes add: “There were early signs that global growth was weakening, and an unexpected increase in interest rates when real wages were not yet rising could destabilise the recovery.

“The risk of a small rise in Bank rate derailing the expansion and leaving inflation below the target in the medium term was receding”.

Ben Bennett, credit strategist at Legal & General Investment Management, says: “Today’s minutes revealed that no one is voting yet for a rate hike, but the rhetoric continues to point towards what we expect will be the first rate hike by the end of the year.

“Ultimately loose policy from central banks has suppressed fundamental problems represented by the global debt overhang rather than solved them. Bond investors need to be cognisant that a sharp widening of credit spreads seems inevitable at some point, and taking significant risk at current valuations is becoming an increasingly dangerous activity. This may take months, quarters or even years to play out, depending on how central banks keep the liquidity game going. But as market volatility drops and more and more people are sucked into spreads that are grinding ever tighter, the risk of a large spike in spreads grows.”

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