Interest rates need to go up along with wage growth according to Bank of England



Interest rates need to go up along with wage growth according to Bank of England

Martin Weale, a rate-setter and policymaker for the Bank of England, has come out as saying that as soon as nation wage growth starts to properly pick up, interest rates must rise too. Wage growth currently sits at an annual rate of 2.9%, and that is expected to go up soon.

He said that ìwith wage growth remaining firm, the tightening labour market means that inflation is likely to rise above target in two to three years timeî, adding that ìpolicy needs to be set with reference to this, rather than the current rate of inflation. As a result, it seems likely to me that the Bank Rate will need to rise relatively soon.î

Weale was one of the BoE economists who voted to increase the base rate last year, but went back on himself earlier this year, voting to maintain the all-time low 0.5%.

The base rate has been at 0.5% since 2009, and Weale claims that that an interest rate hike would also give the Bank of England breathing room, allowing them to then cut it again if the national economy hits any obstacles in the future.

Wealeís final comments stated that ìif events turn out very differently, a path of gradual rate rises might have to be reversed somewhat. Any decision to vote to change Bank Rate will be made on the basis of the balance of risks, but with the comfort that, if subsequent developments mean that any increases need to be reversed, that can be done.î

The general consensus among analysts, given the steady strengthening of our economy over the last couple of years, is that we should see an increase in interest rates at some point next year.

We are not without sceptics though; one large accountancy firm (BDO) have been keen to point out that ìcracks are emergingî in our economy, despite a general positive trend at the moment. They are remaining somewhat optimistic, but cautiously so.

The Bank of Englandís next steps will depend, in a large part, on the actions of the Federal Reserve in the USA, which will be revealed this Thursday, when they meet to discuss their plans. Indeed there are those who expect a rate rise from the BoE to begin as early as next week following said meeting.

Mark Carney however has done his bit to see off such predictions, maintain that, while it is likely that rates will rise soon, it is unlikely to happen until early next year, when everything becomes somewhat clearer.