As widely expected, the Bank of England left policy on hold in July, given its promise to keep the rate ultra-low for some time to come to offer the economy space to rebound. More will be revealed in the MPC minutes on July 23 as BoE released no statement today.
The UK has been keeping its monetary policy ultra-loose since March 2009, when it lowered the base rate to a record low and began the expansion of asset purchases, which currently stand at £375 billion.
After more than five years of extraordinary stimulus, both lenders and borrowers slowly begin to prepare for the first rate hike which some economists, and Bank of England (BoE) watchers, expect should come as early as November this year or as late as February 2015.
BoE Governor Mark Carney had remained super dovish until June 12 this year when, during his Mansion House speech, he unexpectedly send a hawkish shock wave across the markets saying the base rate may raise sooner than had been expected.
When asked by UK parliamentarians a few weeks later, Carney argued his hawkish message was aimed at correcting the markets which, according to the June Monetary Policy Committee (MPC) meeting minutes, "put only around a 15% chance on a rise in Bank Rate by the end of 2014."
Carney also several times reiterated that the precise timing of the first rate hike will be data driven. Therefore, each fundamental macro data release will be very closely watched by market participants.
The latest business surveys by Markit Economics suggest second-quarter growth should maintain its momentum, rising at around 0.8%. Even a sudden plunge in manufacturing in May should not weigh on the total growth, economists argue.
But today's trade data again exposed the UK's Achilles' heel as the deficit continued to widen during the second quarter in April and June. Unlike in the first quarter, when a healthier trade balance added 0.3 percentage points to total GDP, the second-quarter deficit may push total growth down. However, higher household spending could offset weaker trade.
Among the set of fundamental data being watched by the MPC is wage growth, which the BoE policymakers view as one of the primary variables for defining productivity growth and consequent monetary policy path.
So far, wage growth has been very benign, slowing to just 0.4% in April from 1% a month before. Three-month average earnings, excluding bonuses, also decelerated to 0.9% from 1.3% in March, which was well below the rate of inflation (1.5%). The Office for National Statistics said the figures came in so low due to earlier bonus payments this year.
However, the commercial data, offering more up-to-date figures, showed starting salaries jumped to a record high in June driven up by a record fall in staff availability, according to the Recruitment and Employment Confederation and KPMG Report on Jobs. The report also showed demand for staff and placements both continue to rise sharply, suggesting further strength in the UK labor market.
If the commercial indicators translate into higher official data in the upcoming months, and the wage growth figures start rising during summer, we could expect the first one or two votes for the rate hike as soon as in August after the Inflation Report.
Speaking before the Treasury Select Committee on Wednesday, Nemat Shafik, a newcomer to the MPC, said that the August estimates on the level of slack "will probably be lower because we have seen that output and employment have improved far better than we had expected."
Shafik also said that spare capacity in UK firms seems to have closed while the bulk of spare capacity in the UK labor market remains. August is also seen by some economists as the month when the first vote for the rate hike may occur.
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