No rate rise till Autumn 2015
The Bank of England’s Monetary Policy Committee (MPC) should hold off on raising interest rates even though its stated threshold for doing so – a fall in the unemployment rate to 7% – is in sight, according to a report.
As well as unemployment, the Committee should add a requirement for real wages to be rising before it increases rates, according to the latest Ernst & Young (E&Y) ITEM Club report.
The report highlights that, as the annual rate of inflation has steadily fallen in the last two years, this has not been accompanied by a rise in earnings. Over the same period that saw CPI inflation fall from 4.7% to 2.1%, earnings inflation has also fallen, from 3.2% to 1%.
The E&Y report also said the MPC should preferably hold off increasing interest rates until business investment and exports have also revived.
“The MPC has set a fall in the unemployment rate to 7% as the threshold for it to consider a rise in interest rates,” the report reads.
“However, with this threshold now in sight, but real wages still falling and the consumer continuing to dominate the recovery, the MPC faces a dilemma.
“Fortunately, with inflation set to move below the 2% target, the MPC will have time to assess this situation, and we do not expect the first rate hike until the Autumn of 2015.”
The E&Y Item Club report predicts that unemployment will fall below 7% in the first half of 2014, but that wages will grow only 1.8% in 2014, before rising by 2.7% in 2014, and 3.5% the year after.