Roaring pay growth could force interest rate rise

A surge in earnings growth might be even stronger than official data have shown, with British workers enjoying the largest pay rises since the middle of 2008, reports The Telegraph.

Official data revealed on Wednesday that pay rose by 2.7 per cent in the quarter to April, compared with a year earlier, stronger than the 2.1pc that had been expected.

The figures showed the fastest pace of growth since December 2008. But economists believe that the increase enjoyed by Britain’s workers might actually be something closer to 4 per cent.

Minutes of the most recent meeting of the Bank of England’s committee of interest rate setters released on Wednesday said: “After accounting for the negative impact on average pay levels of the composition of employment growth, [wage growth] could be running at an annual rate somewhat stronger.”

After accounting for changes in the UK’s workforce, such as the changing mix of occupations, employee ages and job tenures, the Bank is likely to say that pay is rising much faster than Wednesday’s figures have shown, according to Credit Suisse.

Signs of revived earnings growth have sparked hopes of the first rise in interest rates since the financial crisis. Analysts at RBS said that the strength of the April wage data and the “hawkish” tone of the June monetary policy committee meeting could steer markets towards expecting a rise in rates before the end of the year.

Suggestions that the Bank could move towards raising its interest rates buoyed sterling, leading the pound around 0.7 per cent higher against the dollar to $1.5755.

Kristin Forbes, of the Bank’s MPC, said: “The next move in interest rates will be up and it’s coming at some point in the not-too-distant future… as we continue to see wage growth… that will make people realise that the date when interest rates go up is coming closer.”

Ms Forbes said that fears that low inflation would hold back earnings growth had been misplaced. The UK climbed out of deflation in the year to May, as inflation rose to 0.1pc in the period, but price growth remains well below the Bank’s 2 per cent target.

“We like to ensure this recovery is sustained, get a better sense of how quickly it can grow before inflation picks up,” she told ITV News. “But then there will come a point when we will need to adjust interest rates, possibly before inflation gets near 2 per cent.”

Ms Forbes said she had worried that “workers will have less power to negotiate wage increases in today’s low inflation environment… instead, wage growth has picked up over the period that inflation has fallen”.

The factors that had kept inflation low, including cheaper oil, a supermarket price war, and sterling’s appreciation “should be largely transitory”, Ms Forbes said.

She said that the UK would probably face “near zero” inflation for several months, but that it would not take any “wizards” or “magic slippers” to get price growth on a trajectory back towards the Bank’s 2 per cent target.

  Share:

Leave a Reply

*