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UK pay growth may be at turning point: Bank of England's McCafferty

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A Bank of England rate-setter said on Wednesday that a long run of weak wage growth in Britain might be at a turning point, strengthening the case for higher interest rates now.

[LONDON] A Bank of England rate-setter said on Wednesday that a long run of weak wage growth in Britain might be at a turning point, strengthening the case for higher interest rates now.

Ian McCafferty, one of two BoE policymakers who have voted for higher interest rates since August, said the economy was running out of slack, despite signs of a slight slowdown, and inflation could pick up more quickly than the Bank has forecast. "Overall, I think that the risks around our central estimate of slack in the November Inflation Report are probably skewed to the downside, and that in practice there may not be that much spare capacity left in the labour market," he said in a speech.

The Bank has kept interest rates at a record low of 0.5 per cent for nearly six years, since the financial crisis.

Mr McCafferty and fellow rate-setter Martin Weale broke away from their seven colleagues in August and began voting for a rate hike. They argue the bank should get ahead of a possible build-up of inflation pressure as Britain's economy finally rebounds from the crisis and grows at about 3 per cent a year.

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The BoE said last month it expected inflation - which in September fell to a five-year low of 1.2 per cent - would return to its target of 2 per cent only in about three years' time and signalled it was comfortable with the view in markets that a first rate hike would only come deep into 2015.

But in his speech to business people in Liverpool, Mr McCafferty said Britain's low productivity growth rate - which is key to the economy's ability to grow without overheating - might take some time to pick up.

At the same time, only a small change in the expected pace of demand in the economy would have big implications for how quickly slack in the economy is used up.

Mr McCafferty said recent private-sector pay data pointed to a pickup in wages, which could now be at a "turning point", and the trend of more people looking for work might be coming to an end at a level which was a bit lower than once thought, potentially adding to pressures on pay. "Domestic pricing pressures may be less dormant than we think, and might surprise us faster than we expect," he said, adding there was little sign that the recent weakening of inflation was pushing down expectations for future price growth.

REUTERS

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