Most Bank of England officials oppose rate rise

London - Most Bank of England policymakers remained firmly against raising interest rates when they met this month, and data released on Wednesday showed wages rising at their slowest pace on record, indicating inflationary pressure will remain subdued.

The British economy is set to grow faster than other major advanced economies this year, and unemployment fell more than expected in the three months to July, reaching a five-year low of 6.2% compared with 7.7% a year before.

But the growth in employment is not leading to better wages, something the BoE has put at the centre of its debate on when to start weaning Britain off record-low interest rates. Higher pay would push up prices if not matched by greater productivity.

Wages excluding bonuses edged up 0.7% in the May to July period, unchanged from the reading a month earlier. It was the smallest rise since comparable records began in 2001.

British wage rises have lagged behind inflation almost continually since the 2008 financial crisis. The fall in living standards that has resulted has become the opposition Labour Party's main line of attack on the Conservative-led government before a May 2015 national election.

The mix of fast growth and stagnant wages - alongside increased worries about a euro zone slowdown - helps explain why the BoE's Monetary Policy Committee remained split for a second successive month over whether to raise interest rates.

Minutes of the MPC's September 3 to 4 meeting, released on Wednesday, showed two members - Martin Weale and Ian McCafferty - again voted to raise rates, because they thought wage rises that would lead to higher inflation may be looming. The other seven were unconvinced.

"For most members, there remained insufficient evidence of prospective inflationary pressures to justify an immediate increase in Bank Rate," the minutes said.

BoE Governor Mark Carney said last week that central bank forecasts made in August had suggested interest rates would not need to rise before next spring to ensure inflation stayed around its 2% target.

Wednesday's minutes gave no sign that the majority of MPC members would vote for a rate rise before then, even though BoE staff had raised their forecast for third-quarter economic growth to 0.9%, well above Britain's long-run trend.

Instead, policymakers were concerned the prospect of entrenched weakness in the euro zone will revive market fears about debt defaults by some euro zone governments.

"Accumulating evidence of the weakness in the euro area had been the most significant development during the month," the MPC said.

The policymakers also noted some weakening in Britain's housing market, manufacturing and exports. That may presage a slowdown in the fourth-quarter, although they conceded they had been too quick to forecast slowdowns before.

"The minutes of September's MPC meeting struck a fairly dovish tone, while the continued weakness of average earnings growth has bolstered the case for keeping interest rates on hold over the coming months," said Samuel Tombs of Capital Economics.

Wednesday's labour market data offered partial support for the view that Britain's rapid growth may be cooling. The 74 000 jobs created in the three months to July was the lowest number in more than a year.

Labour cost focus

The minutes made little mention of Thursday's referendum on Scottish independence. A late surge in support for independence in opinion polls came only after the MPC meeting.

However, the minutes did show a slight shift in emphasis in the BoE's assessment of the labour market.

Since Carney's arrival at the BoE last year, it has focused on the labour market as a guide to future inflation pressures that might need to be countered with higher interest rates.

The initial focus was on unemployment, and more recently on wage growth. But Wednesday's minutes suggested greater attention was being placed on unit labour costs - a measure which blends wage and productivity data and represents how much an employer must pay for a worker to produce a certain amount.

"The key judgement was whether unit labour costs would rise more or less rapidly than suggested by the August Inflation Report projections," the BoE said.

The BoE forecast in August that unit wage costs would fall by 0.25% this year and rise by 1.5%next year. Average weekly earnings were forecast to rise by 1.25% this year and 3.25% in 2015.

Growth in average weekly earnings - the main measure from the Office for National Statistics - has been distorted by changes in the timing of bonuses because of a tax cut last year.

The BoE also said changes in the make-up of the labour force as new people started jobs could be depressing wages. A greater proportion of new starters and people with fewer qualifications would push down average pay.

Wages should start to rise more normally once the new workers gain experience, but this need not lead to higher inflation if they also grow more productive, the BoE said.