Bank of England advised to focus on wages instead of rate rise
Interest rates should be retained at their historic low of 0.5% until that time that actual wages improve for workers in the UK, according to major financial organisation the EY Item club.
The Item Club, who specialise in making economic forecasts, have said that the Bank of England should hold their resolve with their forward guidance policy amidst increased calls for a premature rise in interest rates.
An unexpected level of growth in the UK economy during the last quarter of 2013 as well as a sharp decline in unemployment in the past few months had led many to call for interest rates to be risen earlier than the 2016 forecast initially made by Bank governor Mark Carney.
Carney had previously identified that he would not consider a rise in interest rates until unemployment fell below 7% in the UK, which was initially predicted to be some time in 2016.
However, the economic performance of Britain in the past 3 months has meant that the threshold is set to be emphatically breached as early as spring this year, but the Bank has remained hinged on its stance, reiterating the EYís stance that wages need to improve first.
EY pointed out that the growth rate of worker wages in the past year has been almost half that of inflation, despite a recent fall to 2% on the Consumer Price Index. This has contributed towards the ongoing cost of living crisis because workers are not feeling the spending power affects that are typically associated with a growing economy.
The Item Club has forecasted that the total growth in the UK will increase to 2.7% this year, though wage growth will only be at around 1.8%. Even though this figure is set to improve to 2.7% next year and 3.5% the year after, this is still a significantly long period in which workers will have to experience the actual value of their wages decrease in relation to inflation.
The report from the EY Item club read: The Bank's monetary policy committee needs to urgently supplement the forward guidance threshold to include positive growth in real wages alongside a lower threshold for unemployment".
"Raising interest rates too soon, before real wages have also begun to improve, could risk choking off the fragile consumer led recovery."
They also said that small businesses must be revitalised and investment levels restored before interest rates should rise in order for a ëbalanced recoveryí to be achieved.
They have argued that the current economic growth has been based on an increase in consumer spending, but have warned that with wages remaining stagnant that current levels of purchasing will not be possible to sustain moving forward in the future.
EY have now called for interest rates to first rise in the third of fourth quarter of next year, citing that this will be a time where ëconditions for a broader recovery should be satisfied.
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."