Labour Market and Wage Pressures Behind Rate Hike

While the MPC’s improved confidence that Q1 GDP weakness was temporary helps explain the timing of the hike, they can hardly be accused of being upbeat on the UK growth outlook.

This rate hike looks to be all about the tight labour market and the risk of rising wage pressures. While the MPC’s improved confidence that Q1 GDP weakness was temporary helps explain the timing of the hike, they can hardly be accused of being upbeat on the UK growth outlook. Rather it’s their pessimism about the supply-side that is pushing them to start to normalise, albeit very gradually. The lack of spare capacity and very low unemployment is threatening to boost domestic wage and cost pressures, exacerbated by the impact of low productivity on unit labour costs.