Your boyfriend is chatting up the consumer!
3 November 2017 by Ben Hayward
Gary has already grumbled about some of the comments from his “unreliable boyfriend” at the MPC (see yesterday’s blog The Unreliable Boyfriend Turns Up to the Party), however, on the ABS desk we took a more positive message from the responses to some of the questions at the press conference, particularly with reference to the UK consumer.
There has been a lot of focus over the last six months on the quantity of lending to the consumer and expected performance, and the BoE has reined in lending via its macro-prudential toolbox. However, when questioned yesterday on whether high street banks should be passing the rate rise on to savers, Mr Carney took the opportunity to let his answer meander into the lending markets.
He commented that most mortgages are fixed rate, and so there wouldn’t be any impact on those borrowers in the short term. He also said that other “consumer credit was relatively insensitive to the level of bank rate”, and that this was due to the significant amount of spread charged on top of the bank rate, more specifically for example “if credit card fees are in the high teens percentage points, exactly where bank rate is doesn’t make a big difference to it”.
So a positive set of comments on the expected performance of consumer debt, relative to the change in bank rate.
Mr Carney wasn’t finished there though, he was later questioned on his expectation that wage growth was going to pick up.
He first addressed real wage growth, by saying that the Committee expected the recent focus on elevated inflation to ease off into 2018 as base effects wore off, and then he spent longer discussing the drivers of actual wage growth.
Obviously the labour market is tightening, with unemployment at very low levels. Indicators for this tightening includes job vacancies at elevated levels in comparison to before the crisis. In addition job churn has picked up, people are taking a risk to leave their existing roles, reflecting confidence in the strength of the labour market. Self-employment is up, and new hire wages are notably higher than existing wages, which will force existing wages up during re-negotiations. This was justified by the BoE surveys which have said wage growth wouldn’t pick up in 2017, and it hasn’t; but the surveys have indicated a positive change in 2018.
The requirement to all this was that productivity would need to improve to support this, but that this should come through as the outlook for investment was good.
Mr Carney also indicated that the quality or composition of the past change in unemployment will improve. The historic drop in unemployment wasn’t matched by wage growth as it was largely driven by low skill, low wage employment, but this also has been changing.
We shouldn’t anticipate a step change here, indeed wage growth should “gradually build through 2018, and into 2019”, and should be 3.25% type growth rather than >4% seen pre-crisis.
However taken together, what we heard is that the BoE is focussed on keeping lending from getting to bubble-type levels, which is prudential, and that existing lending is relatively insensitive to bank rate rises, the BoE also doesn’t foresee many rate rises over the next few years, and the consumer should enjoy an upswing in wages and an improvement in the household balance sheet.
To be clear, these are Mr Carney’s comments around his expectations – we are perhaps a bit more cautious, we will wait for some hard data to support this before getting more optimistic, as we have been waiting a while for wage growth and there are headwinds.
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