POLITICS

Bank Of England May Only Hike Interest Rates Once Wages Rise Enough

12/08/2014 15:18 BST | Updated 12/08/2014 15:59 BST
Pool via Getty Images
LONDON, ENGLAND - MAY 14: Mark Carney, the Governor of the Bank of England, speaks during a news conference to present the UK Quarterly Inflation Report on May 14, 2014 in London, England. The bank of England stated that interest rates will remain low for 'some time', a move to reassure againt fears of rising mortgage costs. Mr Carney also pledged to examine the issue of mortgage affordability surrounding falling wages. (Photo by Lefteris Pitarakis - Pool/Getty Images)

Mark Carney is set to signal that Bank of England rate-setters will finally hike interest rates once the growth in Britons' wages takes hold.

Britain's recovery to pre-crash levels after six years in the economic doldrums has stoked fevered debate about when Bank officials will raise interest rates from their 0.5% historic low, which will put pressure on mortgage holders and businesses.

Amid expectations that the first rate hike in over five years could come as early as the end of the year, Carney is expected to unveil a focus on wage growth in his latest outlook for the UK economy.

The issue of how robustly Britons' wages are growing was highlighted by Carney in April, who said a "substantial increase" was needed in order to secure the economic recovery.

“We all want the recovery to be sustainable and the early signs are consistent with that. But we need to see real growth in every sector and in the current level of wages," he told the Bristol Post.

Speaking at the Commonwealth Games in Glasgow earlier this month, Carney said that the Bank would "update its thinking" on how to take pay growth into account.

Carney is set to deliver his updated economic outlook as the Office for National Statistics reveals its latest figures on how wages are growing. Britons' wages have recently been growing much more slowly than inflation, raising fears that the pay squeeze is far from over.

According to the latest official figures, pay including bonuses for employees in Britain over March to May was 0.3% higher than a year earlier, rising to 0.7% when bonuses are stripped out, which is significantly below the rate of inflation, which rose to 1.9% in June.

ON THE BLOG:

Carney will also give his latest estimate on the UK economy's progress in eating up "slack" or wasteful spare capacity in the economy, which rate-setters on the Bank's Monetary Policy Committee (MPC) want to see fall before hiking rates.

A sharp narrowing of the Bank's estimate of this figure is likely to add to expectations of an interest rate rise this year.

Meanwhile, inflation has been hovering below its 2% target for some months but the projection for its future path could also offer clues on rate-setters' thinking.

The question of when the Bank will hike interest rates has attracted increasing speculation amid fears that Carney may have to do more to rein in Britain's property market.

The Bank of England's latest Inflation report comes a year since Carney launched his flagship "forward guidance", and was forced to change it six months later.

Designed to assure households and businesses about the path of interest rates by linking them to the unemployment rate, it had to be redesigned when the UK jobs picture improved much more quickly than expected.

Investec economist Victoria Clarke said: "We will be looking out for yet another twist to forward guidance in the shape of the MPC placing greater emphasis on wage growth (or the lack of it) in policy setting.

"This could be crucial in determining the timing of the first move on rates. If we see this, expectations for the timing of the first move could be pushed back into 2015."

11 Reasons The Bank Of England May Be Ignoring A Housing Bubble