UK pay growth adds to case for interest rate rise, says Bank of England policymaker

A Bank of England policymaker has argued that pay growth may be at a “turning point”, strengthening the case for higher interest rates.

The comments came as the Bank’s governor, Mark Carney, said inflation was expected to dip below 1% in coming months, which means he will have to write to the chancellor to explain why inflation is more than a percentage point below the 2% target. Carney signalled financial markets were right to rule out an interest rate rise any time soon.

Ian McCafferty, a member of the Bank’s rate-setting monetary policy committee (MPC), set out his reasons for raising interest rates sooner. Speaking at a breakfast organised by the Institute of Directors in Liverpool, he talked of a “remarkable” recovery in the economy, and said raising rates now would ensure that increases will be “gradual and limited”. He is one of two MPC members who have voted for higher rates since August.

Carney predicted a slow and steady rise in inflation towards 2%, in an interview with the Birmingham Post. He added: “Our message is that interest rates are going to increase. We don’t know the precise timing that will start, but what we are emphasising to businesses, to mortgage-holders, to homeowners and to individuals is that what’s most important is the path of interest rate adjustments. That path is expected to be a gradual set of interest rate increases and to a more limited extent than the past.”

McCafferty noted that “the main puzzle has been the recent weakness of average weekly earnings which has been at odds with the strength of the survey indicators”. But he added that the most recent private sector pay data suggested a pickup in wage growth.

“The risks around our central estimate of slack in the November inflation report are probably skewed to the downside, and in practice there may not be that much spare capacity left in the labour market.”

McCafferty said policymakers need to look through the recent sharp fall in inflation, as this reflected falling food and energy prices as well as the 10% strengthening of the value of sterling. In the long run, he is worried that there is “a risk that pay and unit cost growth will begin to rise faster than is consistent with our inflation target”.

The Bank slashed interest rates to a record low of 0.5% during the financial crisis and has kept them at that level for nearly six years. McCafferty and Martin Weale broke away from their seven colleagues on the MPC in August and began voting for a rate rise.

In its latest set of projections in last month’s inflation report, the Bank said it expected inflation, which dropped to a five-year low of 1.2% in September, would return to its 2% target in about three years’ time.

Powered by article was written by Julia Kollewe, for The Guardian on Wednesday 10th December 2014 10.26 Europe/London © Guardian News and Media Limited 2010


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