INTEREST rates will only rise if wages do the same, was the message from Bank of England Governor Mark Carney today, as he highlighted the risks to Britain's recovery.
Fears of an impending interest rates hike this year all but disappeared as Mr Carney warned that low pay and overseas crises had dampened his desire to exert monetary control.
Policy-makers halved their prediction for wage growth this year from 2.5 per cent to 1.25 per cent, meaning it will continue to lag behind inflation, figures in the Bank's quarterly inflation report showed.
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Official quarterly pay data published shortly ahead of the report were even worse than the Bank had thought, meaning the prospect of an interest rates increase
In his latest statement, which came a year after the Bank's forward guidance notes, Mr Carney placed emphasis on the absence of wage growth in the economy, and that it needs to happen for rates to rise.
Mr Carney said that sustained economic momentum is looking more assured and that future interest rate rises were likely to be gradual and limited increase.
Furthermore, he said that the normal interest rates of tomorrow are likely to be lower than those of yesteryear.
He said future rate rises were consistent would be gradual and limited.
A year ago the Governor had set a target rate of seven per cent or lower UK unemployment as a point where the Monetary Policy Committee (MPC) would start to consider rising interest rates above their 0.5 per cent historic low. However, the failure of wages to keep pace with inflation is likely to ensure that rates remain unchanged for the foreseeable future, Mr Carney suggested, noting that "pay growth has been remarkably weak, even as unemployment has fallen rapidly.
“Geopolitical risks have intensified, and structural adjustment continues in the euro area, where growth is expected to be modest," added Mr Carney, as he warned of external factors on the UK economy.
Economists are divided over whether the first rate rise since 2009 will happen this year or in early 2015.
The City is focusing on the Bank’s forecast for unused capacity in the economy, what is called 'slack', which has been cut from one-and-a-quarter per cent to one per cent.
“It seems likely that slack is being used up at a faster rate than expected,” said the Bank’s inflation report .
But it added that slack appeared to have been greater than previously thought.
The mixed messages are likely to leave homeowners and savers no wiser over when the first interest rate rise will happen.
Minutes of last month’s MPC meeting showed that members were divided over whether an early rate increase would derail GDP growth, though they remained unanimous on leaving policy on hold for the time being.