Wages for British workers will rise further in the coming months, stoking inflationary pressures, a top Bank of England policymaker said today, in a sign the central bank still has its sights set on an interest rate hike.
Sir Dave Ramsden, a member of the rate-setting monetary policy committee (MPC), said that he expects wage and domestic inflationary pressures to pick up in the coming months.
Meanwhile, he said the slowdown in the British economy in the first quarter appears to have been only temporary, thanks to bad weather. Data since then point to a recovery in the current quarter, he said, although Brexit negotiations remain the single biggest downside risk.
“I expect GDP growth to resume at a steady but unspectacular pace, and demand to continue to rotate away from consumption and towards trade and investment,” he told a Barclays conference on inflation in London.
Ramsden is considered by City economists as one of the most dovish members of the MPC, having voted in the minority against hiking the Banks main interest rate in November, the first such rise in a decade.
“Wage growth has now been rising steadily over the past six months, and unit labour costs have been rising towards growth rates consistent with overall inflation at target,” he said. “The period of unusually subdued growth in wages appears to be coming to an end.”
The Banks measurements show the amount of “slack” – the amount left for unemployment to fall before inflation builds – appears to still be falling, Ramsden said. That could potentially pave the way for an interest rate rise in the coming months, with MPC meetings scheduled for 21 June and 2 August.
The Bank had prepared markets for an interest rate hike in May, but dire economic data in the first quarter forced the policymakers to stay their hand. Today Ramsden explained that at the May meeting the Bank had already found “only a very small amount of excess supply”, or slack.
The economist, who was formerly the chief economic adviser to the chancellor, also tried to explain the failure of wage growth to pick up since the financial crisis as fast as it has on previous occasions when unemployment has fallen so low.
He pointed to three possible reasons for the unusual situation: a lag between unemployment falling and wages picking up, particularly in the context of higher uncertainty for job movers; technology reducing workers' bargaining power; and a failure of unemployment data to accurately represent slack.