Base Rate  

ONS data suggests no need for base rate to rise

ONS data suggests no need for base rate to rise

The UK economy appears to be a "Goldilocks" situation where wages are rising faster than inflation, but there is no need for interest rates to rise, according to Ben Brettell, senior economist at Hargreaves Lansdown.

Mr Brettell was commenting in light of the latest data from the Office for National Statistics, which showed wages rose by 2.9 per cent in the first three months of the year, compared with a 2.7 per cent rise in inflation.

Unemployment remained at 4.2 per cent, which is below the Bank of England's 4.5 per cent target rate for "full employment."

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Mr Brettell said that despite those positives, the fact that wage growth slowed to 2.6 per cent in April showed inflation pressure is not building in the economy to the extent that the Bank of England will need to put the base rate up.

He said this is a Goldilocks situation for the economy. 

The central bank had been expected to put the base rate up in May, but weak GDP growth, of 0.1 per cent in the first quarter of 2018, meant the bank kept it at 0.5 per cent.

Perhaps the most worrying piece of data for policy makers is the drop of 0.5 per cent drop in productivity per hour in the first quarter of 2018, compared with a rise of 0.7 per cent in the last quarter of 2017.

Falling productivity accompanied by rising employment has puzzled economists. The Institute of Economic Affairs (IEA), a think tank, believes the cause is that, as unemployment falls, more low skilled workers become employed, and this drags down the average productivity of the labour force.

The think tank noted that France has much higher unemployment than the UK, and much higher productivity. It’s view is that only the more skilled workers are able to get jobs in France, meaning only the more productive workers have jobs.

david.thorpe@ft.com