Bank of England urged to hold back interest rates until wages catch up

The Bank of England has been urged to keep interest rates down until real-time wages begin to grow, to avoid creating a “lopsided” economic recovery.

A report from the EY Item club says that the bank should consider boosting their forward guidance policy, which currently pledges not to up interest rates until unemployment levels fall to 7%.

However, unemployment levels have fallen faster than forecasted, and are expected to hit 7% in the first half of this year, rather than in 2016.

Meanwhile, wages have not gathered a similar level of momentum and have risen at less than half the rate of inflation. The report calls for this factor to be added to the bank’s forecast policy.

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.”

Slow growth in wages has meant that they are falling in real terms. The report says that they will grow by just 1.8% this year, before slowly picking up to 2.7% over 2015 and 3.5% in 2016.

The report also warns that the recovery, which has so far been supported by consumer spending, must be rebalanced through improved business and investment, before interest rates are raised otherwise there is the risk of a “lopsided” recovery.

Peter Spencer, chief economic advisor to the Item Club, said: “It is hard to find another episode in time where employment has been rising and real wages falling for any significant period of time.

“The weakness of real earnings is proving to be the government’s Achilles heel, and could prove to be the weak spot in the recovery.

“Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt to income ratio.”

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