Bank of England boss: interest rates likely to rise months before wages do

Bank Of England Building

The Bank of England's governor, Mark Carney, has warned trade union members that they face higher interest rates next spring before they receive rises in real wages.

Speaking at the annual meeting of the Trades Union Congress on Tuesday, Carney said interest rates could start to climb from their record low of 0.5% in early 2015, while above-inflation pay rises were not expected before summer at the earliest.

He added that in order to claw back wages that have declined in real terms since the recession, workers will need to improve their productivity, upgrade their skills and work more effectively.

In a speech to the TUC in Liverpool, Carney cited bank forecasts of real wage growth about the middle of next year. Wages fell 0.2% in the three months to June this year, a decline that contrasted sharply with inflation of 1.6% in July. Carney said: "You will ultimately determine the size of Britain's pay rise. Those in work need to be able to seize new job opportunities in a world where technology and globalisation cause labour markets to shift rapidly."

He added: "Skill levels need to be raised continually. That is of course first and foremost about education. But crucially it also means access to lifelong learning, both on and off the job, available to all."

Carney's comments were in answer to the TUC's call for Britain's workers to receive an inflation-busting wage rise after five years of falling take-home pay. But the governor said interest rate increases were likely to come first.

"With inflation at 1.6%, continuing downward pressure from the appreciation of sterling, and with slack remaining, the current inflation environment is benign. But it will not remain benign if we do not increase interest rates prudently as the expansion progresses," he said. Indicating rate rises in the spring, he added: "Our latest forecasts show that, if interest rates were to follow the path expected by markets – that is, beginning to increase by the spring and thereafter rising very gradually – inflation would settle at around 2% by the end of the forecast and a further 1.2m jobs would have been created."

Carney played down the hit to living standards, telling the audience that rate rises would be gradual and peak well below the previous average of 4% to 5%. And he said paychecks would be healthier in 2017, when he expects wages to increase by 4% on average.

But union officials were left to consider how their members will cope next year with rising mortgage rates months before they receive a pay rise that improves take-home pay.

Paul Kenny, the head of the GMB union, said interest rates should remain low until pay makes up some of the ground lost in the six years from the beginning of the downturn. "The Bank has to recognise that there is some way to go before GDP per head recovers to pre-recession levels," he said.

Len McCluskey, the general secretary of Britain's largest union, Unite, said Carney's speech was "slightly devoid of the real world", with a "pretty depressing" message for workers. "We will continue to argue for a pay rise and against austerity. The message was somewhat depressing – we will have to work longer and get paid less. Talk about a million new jobs to bring stability is not reflected in the real world of zero-hours contracts."

The TUC's general secretary, Frances O'Grady, said she was pleased Carney recognised the pain felt by British workers "from pay cuts deeper than any since the 1920s, and he was clear that Britain deserves a pay rise". She added: "And his caution on interest rates may have been carefully phrased, but showed he understood the worries of households hit by the living standards squeeze."

The Bank of England's interest rate setting committee has already moved closer to increasing base rates after two members voted in favour of a rise at last month's meeting.

Carney said: "The precise timing of the first rate rise is less important than our expectation that, when rates do begin to rise, those increases are likely to be gradual and limited. Rates will go up only as far and as fast as is consistent with price stability as part of a durable expansion, with the maximum sustainable level of employment. For a variety of reasons, ranging from the weakness in the euro area to ongoing repair of household balance sheets, we are not expecting interest rates to head back to the levels seen before the great recession."

In an upbeat speech, also Carney said that the responsible attitude of British workers in the downturn – when they accepted cuts in hours and pay to remain in work – had made the UK more competitive and in a better position to recover. He said that while wages had not fallen by so much in real terms since the 1920s, there was a good reason to believe the UK could grab the opportunity to grow quickly in the future, pushing up productivity and wages.

Powered by article was written by Phillip Inman, economics correspondent, for The Guardian on Tuesday 9th September 2014 19.42 Europe/London © Guardian News and Media Limited 2010


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