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Governor signals wages key to interest rate rise

July 24, 2014

michael settle; michael settle

Bank of England governor Mark Carney has signalled that Britain's faltering wage growth is to have an increasingly important bearing on when interest rates will rise.

His remarks could dampen speculation about a rate hike by the end of this year, with the latest figures showing wage rises running at 0.3%, well below inflation at 1.9% - meaning that pay is falling in real terms.

In a speech at the Commonwealth Games in Glasgow, Mr Carney said policy makers would update thinking at next month's quarterly Inflation Report on how to take into account the prospects for pay.

Wage growth is already one of a number of indicators used by the Bank's Monetary Policy Committee (MPC) to assess the level of "slack" or wasteful spare capacity in the economy - which they want to see narrowed before hiking rates.

But Mr Carney's remarks appeared to suggest that next month the issue of pay could be given an added emphasis within the context of this "forward guidance" framework on rates.

He said: "While some indicators such as wages suggest that there was more labour supply than we had previously thought, it is also true that spare capacity is being used up a bit more rapidly than we had expected.

"A key judgment for the MPC is when and to what extent these developments will translate into real wage growth, and that wage growth into price pressures.

"Next month's Inflation Report provides the next opportunity to update our thinking."

His remarks appeared to echo a passage in the newly-released minutes of the latest MPC meeting.

Rates are at a record low of 0.5 per cent.


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Source: Herald, The (Scotland)


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