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Weak wage growth dampens chance of rate rise

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  • 21/02/2018
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Weak wage growth dampens chance of rate rise
Wage growth has remained floored by inflation and will potentially dampen the prospect of another interest rate rise in May, critics have suggested.

 

Average wages increased by 2.5% in the three months to December, below the current level of inflation at 3%, Office for National Statistics data showed today.

It means that wages are falling in real terms, squeezing the spending power of households – even though unemployment is still low at 4.4%.

Earlier this month the Bank of England warned rates could rise sooner and faster than previously expected.

As a result, markets believe the next base rate rise could happen in May.

But policymakers may now be reluctant to heap more pressure on family budgets with another interest rate rise, critics have suggested.

 

Rate rise seems unlikely

Maike Currie, investment director for personal investing at Fidelity International said: “With the Bank of England increasingly pinning the chances of further interest rate hikes on accelerating pay growth, alongside Brexit progress, the prospect of an early rate rise seems unlikely.

“It’s impossible to ensure sustainable economic growth when people have less money to spend due to anaemic wage growth.

“Meanwhile, inflation remains stubbornly high, with last week’s CPI figure showing inflation stuck at 3%.

“The squeeze on UK households continues with a lethal cocktail of rising prices, paltry pay growth and record low interest rates.

“As long as inflation outpaces earnings growth, UK consumers are getting progressively poorer as each month rolls by.”

 

Food for thought

The Bank of England’s next move is likely to depend on how wage growth and inflation pan out over the coming months, according to Laith Khalaf, senior analyst at Hargreaves Lansdown.

He said: “Economically speaking, not much has changed in the labour market, which is still characterised by low unemployment and stubbornly stagnant wages.

“An interest rate rise is now expected in May, though continuing weak wage growth may prove to be a fly in the ointment.

“A small rise in unemployment also provides food for thought for the Bank of England, and while one data point hardly constitutes a trend, it does merit keeping a close eye on, particularly if it serves to weaken wage growth from an already low base.”

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