Item Club urges MPC to mull wage growth

Bank of England governor Mark Carney. Picture: Getty

Raising interest rates too soon, before wages have begun to improve, could risk “choking off the fragile consumer-led recovery”, according to the Ernst & Young Item Club.

The accountancy firm’s economic think-tank believes unemployment could fall below the MPC’s 7 per cent threshold two years earlier than expected.

Yet the Item Club predicts that wages will only grow by 1 per cent this year, before rising by 2.7 per cent in 2015 and 3.5 per cent in 2016.

Peter Spencer, chief economic adviser to the EY Item Club, said: “It is hard to find another episode in time where employment has been rising and real wages falling for any significant period of time.

“The weakness of real earnings is proving to be the UK government’s Achilles heel and could prove to be the weak spot in the recovery.

“Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt-to-income ratio.”

His comments come ahead of the publication on Wednesday of the minutes from the MPC’s January meeting.

Citi economist Michael Saunders said: “The three-month average for the jobless rate is likely to hit the MPC’s 7 per cent threshold soon. We do not expect the MPC will reset guidance with a new, lower, jobless rate.

“Rather, we expect that, at the February meeting or soon after, the MPC will adopt Federal Reserve-style language that they do not currently intend to hike rates ‘for some time’, without defining how long they mean.”