Business World

Saturday 21 April 2018

British rate hike closer as pay rises set to be largest since 2008

Bank of England governor Mark Carney has many factors to weigh up as he considers moving rates. Photo: PA
Bank of England governor Mark Carney has many factors to weigh up as he considers moving rates. Photo: PA

David Milliken

British workers are in line for their biggest pay rises since 2008 this year as a higher minimum wage kicks in, according to a Bank of England survey that is likely to fuel concerns among its policymakers' over inflationary pressures.

Last week the central bank said interest rates would probably need to rise sooner and by somewhat more than it had previously thought to control above-target inflation.

Wage growth in Britain has been lacklustre since the financial crisis.

But with unemployment at its lowest since 1975 and EU immigrants less keen to come to Britain ahead of its departure from the bloc, the BoE thinks pay is beginning to pick up.

Firms plan to offer average pay settlements of 3.1pc - the highest since 2008 - compared with 2.6pc last year, the BoE said in an annual survey published on Wednesday.

The biggest planned rises were in consumer services, where large numbers of staff are paid close to the minimum wage.

Britain's minimum wage for those aged 25 and over is due to rise by 4.4pc in April to £7.83 (€6.34) an hour, while pay for some younger workers will rise by more than 5pc.

Higher-paid staff are less likely to benefit, with businesses trying to limit basic increases in management pay to 1-2pc to keep down overall wage bills, the BoE said.

Businesses also reported cost pressures from higher mandatory pension contributions, increased inflation, a lack of foreign workers and difficulty recruiting and retaining staff.

"Expectations that the Bank of England will raise interest rates in May will likely be fuelled by their regional agents reporting a pick-up in companies' expected average pay settlements," said EY Item Club economist Howard Archer.

Bank of England governor Mark Carney must weigh inflationary pressure in the domestic economy against the potential impact of Brexit as he considers moving rates.

British inflation hit its highest in more than five years in late 2017, due to the pound's tumble after June 2016's Brexit vote pushing up the cost of imports. Even as this effect fades, the BoE expects inflation to fall only slowly as domestic pressures build.

A Reuters poll on Wednesday showed most economists expect the BoE to raise rates by a quarter of a percentage point to 0.75pc in May, and financial markets see a roughly 50pc chance of a further rise before the end of 2018.

Last week, the BoE forecast annual pay growth would reach 3pc by the end of 2018, up from 2.5pc in the year to November 2017.

The BoE has been overly optimistic about pay before.

But it said on Wednesday that pay deals last year were bigger than firms had predicted in its survey a year ago.

The survey was based on replies from 368 businesses employing 845,000 staff. (Reuters)

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