Bank of England governor indicates real wages will increase by mid-2015 ñ What does this mean for Interest Rates?



Bank of England governor indicates real wages will increase by mid-2015 ñ What does this mean for Interest Rates?

Mark Carney has indicated that wages will rise in line with inflation ìaround the middle of next yearî, from whence they are speculated to outstrip inflation, in a speech to delegates at the Trade Union Congress (TUC).

Recognising the need to pacify an increasingly disgruntled TUC, the Bank of Englandís governor impressed upon the assembly that the TUC as a whole has played its part in the upholding of Britainís workforce in the face of a crippling recession. Noting falling unemployment levels, despite stagnant wage rises, as key to the preservation of our labour force, Carney lauded the sacrifices made by workers everywhere.

Carney also said Britainís lack of productivity can be explained by employersí heightened willingness, as a result of the financial crisis, to employ more staff as opposed to capital investment. Due to these swollen staff numbers, wages have organically diminished.

Although, enhanced levels of employment could be attributed to the reduction of credit flow following the recession, Carney lauded employers for recognising that more and more people were seeking employment. The governor of the BoE stressed the period of economic of growth, currently being enjoyed by Britain, will not be finely balanced for too long and when the Bank sees fit to raise interest rates, employers will quite literally see the fruits of their labour.

Mr. Carney told representatives of the TUC to prepare for a pending base rate hike, and appeared confident that policymakers would ìachieve our mandateî.

Carney mused: ìOur latest forecasts show that if interest rates were to follow the path expected by markets - that is, beginning to increase in the spring and thereafter rising very gradually - inflation would settle at around 2pc by the end of the forecast and a further 1.2 million jobs would have been created."

Why has the workforce expanded?

Following the recession many individuals who previously lacked employment actively sought work, in order to attain the level of financial security necessary to cope with the turbulent aftermath. Factors such as spiralling debt, rising bills and the happiness of dependants heavily influenced the choice of a number of women, professionals of a pensionable age and secondary breadwinners to either find more work or retain their current positions.

Speaking of how many have felt ìcompelledî to continue working Mr Carney said: ìSharp falls in wealth and increased uncertainty about future incomes following the financial crisis have undoubtedly changed many peopleís retirement plans, making them work longer and retire later in order to compensate.

ìThe scale of the debt accumulated by Britainís households in the run-up to the recession has encouraged more people to work, and to work longer.î

Carney went on to note that although an expanding workforce undoubtedly had a tightening effect on wages, the higher levels of employment have paved the way for meaningful recovery, insinuating that positives are always there to be drawn by those discerning enough to spot them.

ìKeeping people in work through a recession maximises the prospects for individuals and the economy,î the Governor said. ìBy staying in work, individuals retain and learn new skills. And they are better placed to participate in the expansion when it gathers force. For the economy, maintaining workforce attachment is the best way to ensure that cyclical downturns in aggregate demand for goods and services do not translate into permanent reductions in our economyís potential to supply them.î

When will Interest rates Rise?

A troubling issue never far from the lips or thoughts of households across the country, there is no definite answer to this question. However, Carneyís latest rhetoric provides some much needed insight for an anxious public.

Carney has focussed on the attainment of record levels of unemployment, standing by his pledge to not raise interest rates until the number of jobless individuals has dropped below 7%. The UKís current adherence to this condition, Carney said, positively influenced a breadth of businesses to invest in staff as opposed to capital, thus vicariously providing the foundation for forecasted wage rises in mid-2015.

Alongside the Bankís prediction for wage growth to take off from mid-2015, it has also projected that the unemployment rate will fall to 5% within the next 3 years.

As such, it appears the Bankís decision to elevate the current base rate of 0.5% will be heavily impacted upon by the performance of the labour market. A continued surge in unemployment levels, more hours for workers and inflationary stability are key factors in the raising of interest rates; however, it must be underlined that Mark Carney gave no exact plan as to the BoEís course of action, instead emphasising that the Bank would make judgements based on the data in front of them.

ìAs employment approaches its new higher level, wage pressures should increase and capital investment should continue to recover,î Carney said. ìProductivity growth should pick up bringing the higher, sustainable pay rises that British workers deserve.î