Does ONS data mistake mean interest rate rise is more likely?

10 October 2017

The UK’s Office of National Statistics has revised upward its estimation of employment costs, following a discovery in their original data release on Friday (6 October). 

The statistics office has revised upward unit labour costs – the cost of employment per person for businesses – from 1.6% to 2.4% for the first half of 2017. 

The revision upwards means that the UK economy is now under more inflationary pressure than previously believed, strengthening the case for the Bank of England to raise interest rates. 

Speaking to The Times, Simon Ward, a UK economist at Janus Henderson who spotted the ONS’s error, pointed out that "domestic cost pressures are significantly stronger than the monetary policy committee assumed in the August Inflation Report", thereby "support[ing] the case for a November rate rise".

Likewise, Jason Hollands of Tilney Bestinvest notes that the increase in labour unit costs "will likely further cement the case for a rate rise next month". Markets, however, he notes, have already priced in a November rate rise. 

Despite the data change, others are not sure November’s rate rise will even happen. According to Darius McDermott, managing director at Chelsea Financial and Moneywise's Industry Insider columnist, while markets have reacted to Mark Carney’s most recent comments as indicating that a rate rise will materialise in November, Brexit related economic uncertainty may still result in rates remaining at their rock bottom levels. 

Either way, Mr McDermott notes, any rise is likely to be going back to the pre-Brexit emergency levels of 0.5%. It is therefore unlikely there will an aggressive rise of rates anytime soon. 

Russ Mould, investment director of AJ Bell was also doubtful of a rise this November. "This change alone is unlikely to trigger a rate rise on 2 November, assuming one is coming," he says.   

"The vote against action at the last MPC meeting was 7-2 so it would represent a big shift to see a majority vote for a rate rise this time, despite all of the heavy hints dropped by Mr Carney, and last week’s weak productivity numbers and mixed industrial sentiment surveys mean that a tightening of policy is not a certainty early next month."

'The Bank of England has spent years ignoring the data'

It is worth pointing out that Mr Carney does have a track record of hinting that a rate rise is on the cards, only for it not to materialise. In September, speaking on the BBC’s Radio 4 Today Programme, he said that the UK would soon start to see a "gradual" increase in interest rates, so long as the UK economy remains stable. 

This has led some, including Ben Yearsley, director of Shore Financial Planning, to view Mr Carney’s rhetoric with a healthy dose of scepticism. 

"I almost feel that they have made their minds up about rate increase regardless of the raw data and whether there is inflationary pressure or not," says Mr Yearsley. 

"They've spent years ignoring the data and moving the goalposts so why should now make any difference! They shouldn't have cut rates last year and the sooner they reverse it the better."

This article was originally written for our sister magazine Money Observer.


In reply to by anonymous_stub (not verified)

Absolutely right - Mark Carney is even more slippery than his predecessor (swervin' Mervyn King), whom I personally regarded as a traitor to the nation for his actions (flooding the system with ridiculously excessive amounts of liquidity, hammering interest rates to virtually zero, featherbedding all the buccaneer banks so they could get out of their self-made strife, etc). Carney won't raise interest rates - he's been hinting for ever and he's worse (not to mention a lot more expensive) than a premium sexchat for failing to deliver satisfaction. He won't raise rates for the simple reason that HM Treasury needs interest rates at rock-bottom so they can continue to meet interest payments on the vast (and still growing) National Debt. If interest rates go up, taxes have to go up to fund the extra interest bill. While we have a government that refuses to get to grips with fiscal probity, people with savings will continue to be robbed. The lesson is that the world is going down the gurgler - there is no point in practicing good personal financial behaviour because you will be robbed. Governments the world over are so indebted that we are only a hair's breadth away from global meltdown. The only thing that keeps it at bay is that EVERY developed nation is in the same boat and ALL the central banks are holding to the same line of near-zero interest rates. Carney won't be the one who breaks that solidarity.

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