Bank of England governor Mark Carney predicts that real wage increases for British workers are on the horizon as the economy recovers, but has hinted that an interest rate rise this year was unlikely.
Speaking at the TUC conference in Liverpool, Mr Carney said that the BoE expected real wage growth to resume around the middle of 2015 and then to accelerate as unemployment continues to fall, reports Emily Cadman and Jim Pickard at FTAdivser sister title FastFT.
He was under “no illusions” about the impact of the recession on ordinary people, but said the flexibility shown by the British workforce in accepting lower rates of pay in return for much higher levels of employment “on balance” have provided a “solid foundation for a durable expansion.”
He argued that Britain’s dire productivity performance has been a direct result of companies employing workers instead of investing in capital, which would have increased efficiency.
Mr Carney said: “The weakness of pay has, in effect, purchased more job creation. It has not resulted in an unusually high level of profits.
“As a result, Britain has an opportunity, not often seen after a deep recession, to reach and sustain a higher level of employment than in the past. And workers can maximise their pay prospects.”
The theme of this year’s TUC Congress is “Britain Needs a Pay Rise” after several years of below-inflation pay rises and the government’s real-terms pay freeze.
In the August inflation report the BoE said it was increasingly watching the labour market and wages in particular for signs that the room for non-inflationary growth in the economy had been used up, and hence interest rates would need to start rising.
Average wages in real terms have fallen by almost a tenth since the start of the financial crisis, the steepest period of decline since the 1920s, and are still rising below the rate of inflation.
And in August the BoE halved its wage growth forecast for average earnings growth this year, leading financial markets betting interest rates would not be raised until 2015.
But private sector surveys have shown increasing signs that starting wages are beginning to pick up, particularly in high-demand sectors.
On the timing of the first interest rate hike, while he told the audience explicitly that “you can expect interest rates to begin to increase” he gave a hint that a rise this year is unlikely.
What matters for economywide inflation, he said, is average wages relative to productivity, and the BoE will be “closely monitoring pay settlements that are bunched around the turn of the year and taking a steer from the pay of new hires as a potential leading indicator of broader pay pressures.”
