Carney: Inflation no excuse to offer low wages

BANK of England governor Mark Carney has warned employers not to use nearzero inflation as an excuse to offer staff low wage settlements, as that might derail Britain’s economic recovery.

Wages have only recently started to rise faster than inflation after years of realterm falls.

Many firms will agree 2015 wage deals in coming months amid falling inflation and political uncertainty before the general election in May.

Mr Carney said that although inflation was just 0.3 per cent in January and might turn negative in coming months, the BoE was working to bring inflation back to its two per cent annual target.

“The MPC (Monetary Policy Committee) will conduct policy in order to bring inflation back to target, probably within two years, and that should inform people, particularly as they are forming judgements about appropriate wages,” he said.

The recent rise in earnings has bolstered expectations that the recovery is finally becoming self-sustaining after the financial crisis.

Average weekly earnings rose by an annual 2.1 per cent in the three months to December, outstripping inflation by the biggest amount since April 2008.

The BoE predicted earlier this month that earnings would rise by an annual 3.5 per cent in the final quarter of this year, still a bit below their growth rate before the financial crisis.

Mr Carney said risks from low inflation in Britain related mainly to the labour market, not to deferred consumption as occurred in Japan, where deflation became entrenched.

Other policymakers are more concerned about the risk of inflation overshooting, however.

MPC member Martin Weale said rates could rise sooner than markets expected. They currently price in a first rise in around a year.

Both Mr Weale and fellow policymaker Ian McCafferty voted five times late last year to raise rates, before dropping this call in January in the face of tumbling oil prices.