Chief economist update: Heaven can wait but the BOE couldn't

"The mistake is to always wait, wait, wait until you have perfect certainty." - Bank of England Governor Mark Carney

The Bank of England (BOE) finally went ahead and did it. It lifted the Bank Rate by 25 basis points to 0.75% at the conclusion of its August Monetary Policy Council (MPC) meeting. To be sure, the British central bank had been itching to do so back in May.

Despite the slowdown in the UK economy in the first quarter of this year, the increased risk on global trade wrought on the world by Trump's protectionist policies and of course the uncertainty over Brexit, the BOE remains optimistic.

The MPC's updated growth and inflation projections are broadly the same as in the May Inflation Report: GDP growth is forecast at 1.4% this year (1.4% in May) before lifting to 1.8% in 2019 (1.7% in May) and 1.7% in 2020 (unchanged). Inflation's expected at 2.3% this year (2.2%), 2.2% in 2019 (2.1%) and 2% in 2020 (unchanged).

These marginal changes in the BOE's projections mask the underlying rationale behind the MPC's decision to raise interest rates this month, which is:

"Although modest by historical standards, the projected pace of GDP growth over the forecast is slightly faster than the diminished rate of supply growth, which averages around 11/2% per year. The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further. In the MPC's central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years."

True that. The unemployment rate in the UK had remained at 42-year low since the start of 2018 up to May (the latest available). Even better this low rate of joblessness comes amid the labour force participation rate reaching a record high 79% in June.

This compares with America's 4% unemployment rate (the lowest since January 2000) and 62.9% participation rate (the highest participation rate was recorded at 67.3% in January 2018).

While this has yet to be reflected in higher wages - annual growth in UK average weekly earnings (excluding bonuses) slowed to 2.7% in May from 2.8% in April and 2.9% in March - the BOE is confident that, "the tightening labour market was expected to continue to feed through into faster growth in domestic costs than had been seen over recent years. That was consistent with recent evidence from the Bank's Agents, the REC survey and rising wage settlements, including in the public sector."

Not totally a bad thing for it'll allow the BOE to go gently on subsequent rate hikes.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: MPCUKparticipation rateAugust Monetary Policy CouncilBank Rateunemployment rateAgentsAmericaBOE Governor Mark Carney The Bank of EnglandBrexitHeavenMay Inflation ReportTrumpUnited Kingdom
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