Bank ditches forecast as UK wages stay low

THE BANK of England has ditched its forecasts for wage growth to return this year as it shifted its stance on when to raise interest rates.

Policy-makers halved their prediction for wage growth this year from 2.5 per cent to 1.25 per cent, meaning it will continue to lag behind inflation, effectively meaning most people will suffer a cut in income, figures in the Bank’s quarterly inflation report showed. Official quarterly pay data published shortly ahead of the report were even worse than the Bank had thought, and are therefore likely to dampen speculation about an interest rate increase this year.

The Bank’s predictions for the wider economy were better, with UK growth figures upgraded from 3.4 per cent to 3.5 per cent for this year, and from 2.9 per cent to 3 per cent for next year.

The Bank said the key measure of wasteful spare capacity or slack in the economy had narrowed slightly to around one per cent, compared to a previous level of around 1.25 per cent.

Slack is the measure that the monetary policy committee (MPC) has said it wants to see narrowed before there can be any rates hike, but there have been contradictory signals as real wages fall and jobs grow strongly.

Bank governor Mark Carney said: “In light of the heightened uncertainty about the current degree of slack, the committee will be placing particular importance on the prospective paths for wages and unit labour costs.”

Mr Carney maintained that forward guidance on interest rate policy remained unchanged and there would not be a “magic number” for wage growth that would prompt a hike. But the shift in emphasis is likely to renew criticism that he is once again moving the goalposts.

Mr Carney linked any rate hike to unemployment falling to seven per cent, which had to be ditched after six months when job numbers improved much more quickly than expected.

Economists expect rates to rise in February 2015 but some had pencilled in this November.