E&Y Item Club Urges BoE To Tie Rate Hike To Real Wage Growth

The Ernst and Young Item Club on Monday urged the Bank of England to tie interest rate hike to real wage growth as unemployment target is set to be achieved this year.

In the latest quarterly forecast, the think tank said unemployment will fall below the threshold 7 percent in the first half of the year.

Nonetheless, the swelling workforce is set to suffer weak growth in earnings, with wages set to grow by only 1.8 percent this year, before slowly picking up to 2.7 percent in 2015 and 3.5 percent in 2016, it said.

The think tank does not expect the average earnings increases to catch up with inflation until the second half of 2014.

Citing a “lop sided recovery,” the Item Club also warned that a more balanced economic recovery through business investment and exports will be crucial before a rate rise is considered.

Peter Spencer, chief economic adviser, Item Club said the Monetary Policy Committee must hold interest rates steady until real wages and business investment are rising. “Otherwise it risks aborting the recovery before it reaches escape velocity.”

With inflation set to move below the 2 percent target, the MPC will have time to assess the situation, and Item Club does not expect the first rate hike until the Autumn of 2015.

The economy is projected to grow by 2.7 percent in 2014, followed by 2.4 percent expansion in 2015. The outlook for 2014 was revised up from 2.4 percent.

The Sky News reported today that the International Monetary Fund is set to upgrade the GDP forecasts for the global economy and the U.K. The lender will lift the U.K. growth outlook for 2014 to 2.4 percent from 1.9 percent, much more than any other major economy.

The IMF is slated to release an update on the World Economic Outlook on January 21.

The material has been provided by InstaForex Company – www.instaforex.com

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