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BoE Cuts Wage Growth Estimate; Wages To Determine Future Actions

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The Bank of England downgraded its wage growth estimate on Wednesday and indicated that future developments on wages would have a greater influence on interest rate decision.

BoE Chief Mark Carney hinted that the rates will not rise soon as wage growth remain subdued and the economy faces challenges from external environment. The bank reiterated that when the bank rate does begin to rise, the pace of rate increases is expected to be gradual.

As slack has been absorbed, financial market expectations of the date of the first Bank Rate rise have moved forward, the bank said its quarterly Inflation Report.

Carney said the amount of slack in the economy is around 1 percent of gross domestic product. It was smaller than the 1-1.5 percent estimated in May.

The bank stated further that in light of the heightened uncertainty about the current degree of slack, the committee noted the importance of monitoring the expected path of costs, particularly wages, in assessing inflationary pressures.

ING Bank NV's economist James Knightley said the general tone is mildly dovish and has seen market rate hike expectations being nudged back marginally. He said the report is rather vague and does not really help in determining the potential timing of rate rises.

The bank estimates wages to increase 1.25 percent on average this year, slower than the 2.5 percent growth projected in May. At the same time, the estimate for the so-called equilibrium unemployment rate was downgraded to about 5.5 percent from 6.25 percent.

Data published earlier in the day showed that wages declined for the first time since 2009 and the unemployment rate hit the lowest since 2008.

The Office for National Statistics said pay including bonuses for employees was 0.2 percent lower than a year earlier during three months to June. The ILO jobless rate fell to 6.4 percent during the same period.

The BoE said data suggests that labor market slack is being used up at a faster pace than expected three months ago. The strength in labor market quantities contrasts with continuing weakness in wage growth.

The central bank said the central path for GDP growth is similar to that in May, although it sees risks from prospective policy normalization in the United States, the challenges in China's financial sector and geopolitical tensions.

The 2014 GDP outlook was upgraded to 3.5 percent from 3.4 percent and that for next year to 3 percent from 2.9 percent.

Inflation is close to the 2 percent target and is projected to remain close to the target in the period ahead, the bank said. Inflation is expected to be around 1.8 percent in two years' time.

Samuel Tombs, a senior UK economist at Capital Economics said the Monetary Policy Committee is underestimating how subdued inflation is likely to be over the coming years. Accordingly, he expects interest rate to rise at a slower pace than anticipated by both the Committee and the markets over the coming years.

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