While the stickiness of inflation will make for itchy trigger fingers among rate setters at the Bank of England, the signs of the economy faltering suggest there's a risk of higher interest rates exacerbating a nascent slowdown. The Bank of England said in its Inflation Report that it expects inflation to have remained unchanged at the start of the year, at 3 percent, as it signaled that interest rates are likely to rise sooner than previously thought.
United Kingdom wage growth is poised to pick up over the coming year, with overall incomes growing for the first time since early 2017, according to the Bank of England's monthly agents' survey. But with the lowest levels of unemployment since 1975 and with European Union emigrants, which are likely to decline after Brexit, the wages are beginning to rise.
The survey, in which 386 businesses employing a total workforce of around 845,000 people, found that private sector employers expect average pay settlements to come in at around 3.1% in 2018, against 2.6% past year.
The biggest planned rises were in consumer services, where large numbers of staff are paid close to the minimum wage.
The British minimum wage for employees over 25 will increase by 4.4% in April to 7.83 GBP per hour (10.85 USD), while wages for young people under this age will increase by more than 5%.
Businesses also reported cost pressures from higher mandatory pension contributions, increased inflation, a lack of foreign workers and difficulty recruiting and retaining staff.
The rate had hit 3.1 per cent in November, which was the highest level in nearly six years. Last week, the bank predicted annual wage growth would reach 3% by the end of the year.
A historical comparison of previous Bank of England interest rate decisions illustrates how past interest rate hikes (since 1999) have not occurred when the all-sector PMI output index has been below 56.5, with the exception of last November, when a 0.25% hike in bank rate occurred with the output index at 55.4.
"While we expect at touch softer reading of 2.9 percent y/y, we think that the core rate might inch higher by 0.1ppt to 2.6 percent y/y in January, which would support our thinking that a Bank Rate rise may now be likely in May", Daiwa Capital Markets commented in its latest report.