Email
Bank of England governor Mark Carney has warned trade union members they face paying higher mortgage rates before many of them receive rises in real wages.
Speaking at the TUC's annual meeting, Carney said interest rates could start to climb from their record low of 0.5% next spring, while inflation-proof pay rises are not expected before next summer, at the earliest.
The governor played down the hit to living standards, telling trade unionists that interest rate rises would be gradual and peak well below the historical average of 4% to 5%.
He also said wages would be healthier in 2017 when he expects pay to increase by 4% on average.
Carney said that rates should start to rise even though there are few signs of inflationary pressures: "With inflation at 1.6%, continuing downward pressure from the appreciation of sterling, and with slack remaining, the current inflation environment is benign. But it will not remain benign if we do not increase interest rates prudently as the expansion progresses.
"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 1.2m jobs would have been created."
Paul Kenny, head of the GMB, said interest rates should remain low until pay makes up some of the ground lost in the six years since the start of the financial crisis. "The Bank has to recognise that there is some way to go before GDP per head recovers to pre-recession levels. Much of the growth since is due to demographic factors. The increase in population means GDP per head is still 5.7% below 2007 levels. This is the root cause of average earnings being down 13.8% in real terms since then."
The Bank of England's interest rate-setting committee has already moved closer to increasing base rates after two members backed a rise at last month's meeting.
Carney told the TUC: "The precise timing of the first rate rise is less important than our expectation that, when rates do begin to rise, those increases are likely to be gradual and limited. Rates will go up only as far and as fast as is consistent with price stability as part of a durable expansion, with the maximum sustainable level of employment.
"For a variety of reasons ranging from the weakness in the euro area, to ongoing repair of household balance sheets, we are not expecting interest rates to head back to the levels seen before the Great Recession."
In an upbeat speech, Carney said that the responsible attitude of British workers in the downturn – when they accepted cuts in hours and pay to remain in work – had made the UK more competitive and in a better position to recover.
He said that while wages had not fallen by so much in real terms since the 1920s, there was a good reason to believe the UK could grab the opportunity to grow quickly in the future, pushing up productivity and wages.
"There is a clear danger of a misplaced if not lost generation of workers in the euro area and in the US. 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.
"There are now over 1m more people in work in the UK than at the start of the crisis. Total hours worked are some 4% above their pre-crisis level.
"That exceptional employment performance has come at a cost, however: wage growth has been very weak. Adjusted for inflation, wages have fallen by around a tenth since the onset of the crisis. To find such a fall in the past, you would have to look back to the early 1920s. The weakness of pay has, in effect, purchased more job creation."
;