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

The statistics office has revised upward unit labour costs – the cost of employm

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 per cent to 2. 4 per cent 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, 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, McDermott noted, any rise is likely to be going back to the pre-Brexit emergency levels of 0.5 per cent. 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 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’

It is worth pointing out that Carney does have track record of hinting that a rate rise is on the cards, only for it not to materialise. This has led some, including Ben Yearsley, director of Shore Financial Planning, to view Carney’s rhetoric with a healthy dose 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 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.’ 

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