News Column

MARKET COMMENT: Sterling Hits 10-Week Low As BoE Wage Forecast Halved

August 13, 2014

Jon Darby

LONDON (Alliance News) - UK stock indices have moved higher Wednesday, but the pound has fallen to a ten-week low against the dollar after the Bank of England released a dovish quarterly inflation report and cut its wage growth forecasts, pushing back market forecasts for the first UK interest rate rise.

By mid-day Wednesday, the FTSE 100 is up 0.4% at 6,661.00, the FTSE 250 is up 0.4% at 15,530.35, while the AIM All-share continues to trade a little lower, down 0.1% at 755.01.

However, the pound has fallen against all its major trading partners, and particularly heavily against the dollar. It is down more than a cent from its Wednesday higher of USD1.6844 to USD1.6711. It is also trading at EUR1.2505, CHF1.5175, CAD1.8255, and AUD1.7979.

"A significant cut to the BoEs wage growth forecast saw sterling crash to a more than two month low against the US dollar, as traders took the revision to mean that the central bank won't hike rates this year, pushing back some forecasts to the start of 2015," said Alpari analyst Craig Erlam.

The bank cut its 2014 wage growth forecast in half, to 1.25% from 1.5%.

The cut comes after official data released earlier Wednesday showed the first fall in wages including bonuses in more than five years. Average earnings, excluding bonuses, grew by just 0.6% year-on-year in the three-months to June, slipping from 0.7% growth previously and disappointing economists that were expecting growth to remain stable. Including bonuses, average earnings fell 0.2%, reversing some of the 0.4% growth recorded last month.

The markets are now predicting that the Bank of England will not be raising interest rates until wage growth starts to pick up. The fact that unemployment has continued to fall without wage inflation has become the key issue for the Bank of England.

Governor Mark Carney said Wednesday that this must mean that there was more slack in the labour market than originally anticipated. The Monetary Policy Committee members now estimate that slack to be about 1.0% of Gross Domestic Product.

The BoE also raised its UK 2014 GDP projection to 3.5%, from 3.4%. Asked how the bank can justify its historic low interest rate of 0.5% while revising up its growth forecasts, Carney said the rate is less effective now than before the recession due to the remaining economic slack.

"0.5% today is less stimulative than 0.5% before the financial crisis," Carney said.

The bank is also expecting economic growth to slow again, to 3.0% growth in 2015 and 2.6% in 2016.

It reduced its calculation of the equilibrium rate of unemployment - the rate that causes no inflation - to 5.5%, from its previous estimate of 6% to 6.5%, meaning that unemployment can continue to fall without putting extra pressure on the policy makers for a rate rise.

"Today's report comes across as a solid signal that the majority of BoE rate setters are planning to wait until next year before hiking rates," said Berenberg chief UK economist Rob Wood.

While the pound fell, interest rate-sensitive equity sectors received a boost, with the FTSE 350 Real Estate Investment Trust sector index up 1.2%, and the housebuilders all rallying. Barratt Developments is among the top gainers in the FTSE 100, up 2.3%, while FTSE 250-listed Redrow is up 3.3%.

There has been concern among the housebuilders that the recent Mortgage Market Review, which requires stricter lending criteria, would lead to a permanent restriction on lending. However Carney said Wednesday that the MMR was "not viewed as something that would create permanent impact." Instead it should just create a higher quality of lending, the governor said.

The market focus will now switch to the US where Wall Street is expected to open higher ahead of a number of pieces of data and speeches from Fed officials. Futures currently indicate that the DJIA will open up 0.4%, while the S&P 500 will open up 0.5%.

US retail sales data are due at 1330 BST and expected to show unchanged growth of 0.2% in July. US Business inventories growth is also expected to be unchanged, at 0.5%, when the data is released at 1500 BST.

Federal Reserve member William Dudley is due to speak at 1405 BST, followed by fellow Fed member Eric Rosengren at 1420 BST.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Alliance News

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