The Bank of England are widely expected to keep interest rates on hold at this week’s meeting.
Considering the recent economic data emerging from the UK, the economy would seem – at best – fragile. The all too familiar disconnect between a robust labour market, lagging wages and inflation will prove to be the defining battle in this uncharted war of easy monetary policy.
Consumer confidence has declined to levels last seen in the wake of the Brexit vote, while growth forecasts have halved. Additionally, Brexit’s path has proven to be more problematic than the BOE had originally predicted. Thus, the bank may revise growth expectations.
Meanwhile, inflation has overshot forecasts made at the beginning of the year, topping 3%. The central bank has raised interest rates to help curb the acceleration of interest rates.
Higher inflation will also add fuel to Britain’s woes, causing low productivity and weaker investment – slowing slow growth down.
Although, the central bank has signaled additional interest rate hikes, a cautious approach will likely be taken in the face of Brexit uncertainties.
Mark Carney’s speech will once again be essential to the pound’s value. If the governor hints that there may be a need for more aggressive monetary policies, the pound could consequently rise.
Labour market growth is the real surprise for the BOE. Unemployment has fallen by more than expected, suggesting less slack in the economy. The labour market should be able to withstand the tighter monetary policy.
However, like so many other developed economies navigating their way out of easy money programmes, the UK’s wages remain weak. Excluding bonuses, wages were 2% higher over the three months prior to May, compared to the same period in 2016 – lower than inflation.