Economists say mistake helps support case for monetary policy committee to raise rates as early as next month
The UK’s official statistics agency has added to the pressure on the Bank of England over whether to raise interest rates as soon as next month after admitting it underestimated the pace of rising labour costs.
The Office for National Statistics said on Monday it made a mistake in its original calculations for the growth in unit labour costs, which is the price paid by employers to produce a given amount of economic output. The measure stood at an annual 2.4% in the three months to June, as opposed to the 1.6% initially published by the country’s official statistics body on Friday.
The revision could indicate momentum for wages in the UK, which is a factor under close observation from Threadneedle Street, as it looks to raise interest rates for the first time in more than a decade. Rising labour costs could indicate economic strength and justify a rate hike.
Howard Archer, the chief economic adviser to the EY Item Club, said the change “may facilitate” a November rate hike by the Bank. The cost of borrowing could increase from 0.25% to 0.5% should the monetary policy committee decide the economy is able to withstand the increase.
Despite the positive signal for the economy, there have been numerous readings to paint a much weaker picture. The construction sector is reporting signs of a slump, while the Organisation for Economic Co-operation and Development – a thinktank for developed economies – has warned that UK growth will slow next year.
Analysts at the Swiss bank UBS said on Monday a rate hike could also “exacerbate” potential headwinds for the UK economy generated by the Brexit process. “We think there is a strong case for erring on the side of caution,” they wrote.
Despite the lowest levels of unemployment since the mid-1970s, wages for British workers have failed to rise above the rate of inflation. Pay growth is rising nonetheless, although it lags behind a spike in the cost of living from the increasing cost of imports linked to the weak pound.
While the increase in unit labour costs potentially indicate an increase in wages for British workers, the increase could have been driven by non-wage elements such as taxes and pensions contributions paid by employers. This would weaken the ground for increasing rates, according to economists at Barclays.
However Mark Carney, the Bank of England governor, has previously said that rising labour costs could pave the way for a rate rise. Speaking over the summer, he justified the reluctance of the monetary policy committee to increase rates due to “subdued” wages and labour costs.
The ONS apologised for the error, saying it was a consequence of income data from the second estimate of GDP being using instead of data from the quarterly national accounts. “We have corrected this error,” the organisation said.