Rate 'to rise before wage growth'
Workers are likely to be hit by higher borrowing costs before any end to the squeeze on their pay packets, Mark Carney signalled to unions today.
The Bank of England governor told the TUC Congress that a resumption of wage growth in real terms was likely around the middle of next year.
But his speech also reinforced the City's expectations that interest rates are on course to rise from their record low of 0.5% in the early part of the year.
Inflation is currently at 1.6% but latest figures from the Office for National Statistics show that actual wages are growing at just 0.6% a year.
Mr Carney praised the attitude of workers who had accepted cuts in hours and pay in order to remain in work and help the UK stay competitive.
He said the workforce and trade unions deserve "great credit" for ensuring that the UK is not expected to suffer a "lost generation" of workers as a result of the downturn.
Adjusted for inflation, he said wages had fallen by around a tenth since the onset of the financial crisis but this has ensured that one million more people are in work in the UK than at the start of the crisis. Total hours worked are some 4% above their pre-crisis level.
Mr Carney, who is the third governor to speak to the annual gathering of unions, said: "The burden of the Great Recession has been shared across the UK. Profits have been squeezed almost as much as labour costs. Employees have seen their real incomes reduced, but more people are in work as a result."
He painted a contrasting picture with the United States, where the burden has been much more concentrated on those who have lost and not regained work, and the eurozone where the unemployment rate is 11%.
Mr Carney said the squeeze on real incomes was pronounced but there had been relatively few calls for higher wages to compensate in the UK.
He added: "As a result of that painful adjustment, the UK is more competitive. And if the world economy returns to a surer footing, there is a real prospect that the UK can properly rebalance its economy."
In contrast, he said there was a clear danger of a misplaced, if not lost, generation of workers in the euro area and in the US.
He added: "Britain's labour force and trade unions deserve great credit for ensuring that this risk is much lower in the UK. By sharing the burden, our economy is better positioned for the future. The question is whether we will seize the opportunity."
As employment continues to grow, Mr Carney said wage pressures should increase and capital investment continue to recover.
He told the audience: "Productivity growth should pick up bringing the higher, sustainable pay rises that British workers deserve."
He said the Bank's latest forecast expects real wage growth to resume around the middle of next year and then to accelerate as the unemployment rate continues to fall to around 5.5% over the next three years.
Mr Carney added: "By the end of our (three-year) forecast, we see 4% nominal pay growth on average across the economy. This is consistent with our inflation target and the economy's potential."
The governor said the current inflation environment was benign but warned this will not remain the case if the Bank fails to increase interest rates prudently as the expansion progresses.
He said: "Our latest forecasts show that, if interest rates were to follow the path expected by markets - that is, beginning to increase by the spring and thereafter rising very gradually - inflation would settle at around 2% by the end of the forecast and a further 1.2 million jobs would have been created."
Len McCluskey, general secretary of Unite, said the speech was "slightly devoid of the real world", with a "pretty depressing" message for workers.
"We will continue to argue for a pay rise and against austerity. The message was somewhat depressing - we will have to work longer and get paid less. Talk about a million new jobs to bring stability is not reflected in the real world of zero-hours contracts.
"The speech offered little, other than saying we might get a pay rise unless things change. It was a missed opportunity to give hope to millions of working people and those struggling to find work, especially young people."
TUC general secretary Frances O'Grady said: "Mark Carney recognised the pain felt by British workers from pay cuts deeper than any since the 1920s, and he was clear that Britain deserves a pay rise.
"His strong support for the living wage, not least by making the Bank of England an accredited living wage employer, should be heard across government and the public sector."
Prime Minister David Cameron's official spokesman declined to comment on Mr Carney's prediction of real-terms wage rises next year.
The spokesman told a regular Westminster media briefing: "The Prime Minister supports employers who choose to pay the living wage, but it is a decision for individual employers. Employment decisions and hiring are for employers.
"The point the Prime Minister would make is that we need a growing economy if firms are to hire more workers, so there are more jobs and better-paid jobs.
"The way you do that is by creating the economic conditions that allow in particular private-sector job creation. I would underline the importance of sticking to the long-term economic plan."