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Wages to Migration: Some Takeaways From the BOE Inflation Report

Wages to Migration: Some Takeaways From the BOE Inflation Report

(Bloomberg) -- The shift in the Bank of England’s interest-rate timetable may have stolen the headlines on Thursday, but the central bank’s Inflation Report also contained other useful nuggets about how policy makers see the economy.

Here’s a rundown of what you may have missed if you haven’t had time to wade through the full 50 pages of analysis, charts and tables.

Nominal Wages Are Picking Up ...

The central bank noted that once the effect of sterling’s 2016 slump drops fully out of inflation, domestic pressures like wage growth will be the main determinant of prices -- and there are signs of a pickup. Pay growth for those switching jobs, rather than remaining in the same job, has returned to around its pre-financial crisis rate.

Wages to Migration: Some Takeaways From the BOE Inflation Report

There are also indications that wages are starting to rise more broadly. Three-month pay growth relative to the previous three months has stayed at around 3 percent on an annualized basis, higher than the BOE expected in its previous forecasts. 

The pace will be boosted as the weakness seen in late 2016 and early 2017 drops out of the annual comparison. The central bank revised up its forecasts for pay growth over the coming quarters.

The BOE also revised its ‘equilibrium rate’ of unemployment, the level which can be tolerate without stoking inflation. That was cut to 4.25 percent from 4.5 percent, or about the current rate in the U.K.

... And Real Wage Growth Will Return

All that good news means real incomes will likely turn positive this year as pay gains finally overtake inflation, the BOE said. That’s welcome respite for consumers and retailers who have been weighed down since the 2016 Brexit vote. Still, the bank isn’t expecting shoppers to become euphoric as consumer spending growth slips to 1.25 percent from 1.5 percent.

Wages to Migration: Some Takeaways From the BOE Inflation Report

The U.K. Is Less Attractive to Migrants

The BOE is pessimistic about workers coming to the U.K, saying there is a chance that net migration could fall more sharply than Office for National Statistics projections imply. That’s partly as a result of uncertainty over the nature of the agreement for leaving the European Union, especially any changes in working arrangements, but also because of concerns the British economy is looking less attractive.

“There tends to be a positive relationship between migration flows to the U.K. and economic conditions in the U.K. relative to those in migrants’ home countries. Bank staff analysis suggests that the subdued outlook for U.K. gross domestic product per capita, combined with stronger growth prospects in other countries, would, on its own, reduce net migration by a little more than implied by the ONS projections over the next three years.”

The BOE said abrupt falls in migration could result in labor shortages in sectors that are reliant on migrants, and hence greater pricing pressures within those areas. Logistics and food processing were singled out as industries where its agents had seen this reported.

Investment Is Under Pressure

The Inflation Report lays out how Brexit is weighing on companies’ decisions, meaning that the growth in business investment in the past year is likely to have been weaker than it would otherwise have been, given the recent surge in global growth.

Citing estimates based on their Decision Maker Panel Survey, officials suggest nominal investment was around 3 to 4 percent lower over the year to mid-2017, although “in view of the impact of the fall in sterling on the cost of investment goods, the impact on real business investment is likely to have been larger.”

Rates Are Being Passed Through

Despite complaints from some quarters that the BOE’s November hike hadn’t been passed on to savers yet, officials seem reasonably relaxed about the feedthrough into the retail sector. Deputy Governor Ben Broadbent echoed that sentiment in the press conference Thursday, saying he didn’t feel either savers or borrowers are being unfairly treated by the banks.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net, Jill Ward in London at jward98@bloomberg.net, Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint

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