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Bank of England cuts its predictions for wage growth


Bank of England Governor Mark Carney

Bank of England Governor Mark Carney

Bank of England Governor Mark Carney

The Bank of England has ditched its forecast for real-terms wage growth to return this year as it signalled that it was placing increasing emphasis on weak pay data in deciding when to raise interest rates.

Policy-makers halved their prediction for wage growth this year from 2.5% to 1.25%, meaning it will continue to lag behind inflation, figures in the bank's quarterly inflation report have shown.

Official quarterly pay data published shortly ahead of the report were even worse than the bank had thought, and therefore likely to dampen speculation about an interest rate hike this year.

The bank's predictions for the wider economy were better, with UK growth figures upgraded from 3.4% to 3.5% for this year, and from 2.9% to 3% for next year.

Unemployment is expected to drop more quickly, falling below a rate of 6% this year, while inflation projections were little changed, hovering just below 2% over the next three years.

The bank said the key measure of wasteful spare capacity or slack in the economy had narrowed slightly to around 1%, compared to a previous level of around 1.25%.

Slack is the measure that the monetary policy committee (MPC) has said it wants to see narrowed before there can be any rates hike, but there have been contradictory signals about this as real wages fall and jobs grow strongly.

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Bank governor Mark Carney said: "In light of the heightened uncertainty about the current degree of slack, the committee will be placing particular importance on the prospective paths for wages and unit labour costs."

Mr Carney maintained that forward guidance on interest rate policy remained unchanged and there would not be a "magic number" for wage growth that would prompt a hike.

But the shift in emphasis is likely to prompt renewed suggestions that the governor's changing stance on interest rates is like the behaviour of an "unreliable boyfriend".

It comes a year after Mr Carney introduced the first version of forward guidance, linking any rate hike to unemployment falling to 7% – which had to be ditched after six months when job numbers improved much more quickly than expected.

The governor said that in spite of the new emphasis on pay, the monetary policy committee "does not have a particular threshold for wage growth" to decide when it considers an increase.