Forecasting Group Advises BoE to Let Wages Rise Before Interest Rates

The EY Item Club report calls for Bank of England policymakers to bolster their forward guidance policy which pledges not to consider lifting the rate from 0.5% until unemployment has fallen to 7%.

The forecast says this threshold is now expected to be met in the first half of this year, two years earlier than first expected.

However, wages remain subdued, growing at half the rate of inflation – although this has slowed recently to 2% – and the report calls for consideration of this factor to be added to the Bank’s policy pledge.

Slow wages growth means they are falling in real terms and represent what the report says is an “Achilles heel” for the coalition – which is under pressure over what Labour calls a “cost of living crisis”.

The Item Club report predicts UK economic growth will surge to 2.7% in 2014 but that wages will only grow by 1.8% this year, before slowly picking up to 2.7% in 2015 and 3.5% in 2016.

It calls for the Bank’s monetary policy committee (MPC) “to urgently supplement the forward guidance threshold to include positive growth in real wages alongside a lower threshold for unemployment”.

The report says: “Raising interest rates too soon, before real wages have also begun to improve, could risk choking off the fragile consumer led recovery.”

via The Guardian

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza