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Ramsden joins calls for rate hikes

Higher interest rates could be just around the corner as wage growth is at last picking up – persuading one of the Bank of England’s most reluctant policymakers that emergency rates can be scrapped soon.
Sir Dave Ramsden voted against ­November’s rate rise from 0.25pc to 0.5pc, but was in a minority of two on the nine-strong Monetary Policy Committee. Since then, however, he believes the economy has picked up and wage growth in particular is rising, meaning the Bank has to act to push ­inflation down to the 2pc target.
“Wage growth has now been rising steadily over the past six months,” said Sir Dave, the Bank of England’s deputy governor for markets and banking.
“The period of unusually subdued growth in wages appears to be coming to an end.”
The Bank of England believes pay could rise by 3.5pc over the course of 2019, the fastest since 2015.
Ramsden joins calls for rate hikes

The Bank of England has persistently over-estimated wage growth, but Sir Dave Ramsden believes that pay is at last picking up

Credit:
Bank of England
In part this is because the economy is growing at a steady rate – Sir Dave believes official estimates of 0.1pc GDP growth in the first three months of the year understate the true picture.
As a result he has joined the rest of the MPC to anticipate a series of rate hikes – most likely three over the coming three years. Earnings growth might still not rise to pre-financial crisis levels, with factors including low productivity growth, new technologies and a lack of bargaining power holding back wages, he said.
Even though unemployment is at its lowest level since the Seventies there could be more flexibility in the jobs market, with more education giving workers more flexibility and more ­online job adverts making it easier to find workers, dampening pressure to put up salaries.
The lack of productivity growth in particular means wages only need to rise a small amount before it creates ­inflationary pressures and forces the Bank to raise rates, he said.
Ramsden joins calls for rate hikes

Three rate hikes over three years, as anticipated by financial markets, should bring inflation down to 2pc. Keeping rates on hold would leave inflation too high, the Bank of England believes

Credit:
Bank of England
“Given 1pc productivity growth, wage growth only needs to reach 3pc, not four, to be consistent with the 2pc [inflation] target,” Sir Dave told the Barclays Inflation Conference.
That compares with 2pc productivity growth before the crisis, when wages could grow by 4pc per year without generating too much inflation.
However he does hope this situation will not be permanent and productivity growth could recover.
“I am optimistic about the potential for fintech and other new technologies to lead to productivity gains, either ­directly or by driving competition, and in turn to potentially higher, and non-inflationary, wage growth,” the deputy governor said.
Sir Dave said that so far much of the evidence of higher wages rests on pay rises for those moving jobs.
Job-hoppers typically get a pay rise of 7pc or 8pc, while those staying put are more likely to receive between 2.5pc and 3pc extra per year. This is backed up by the Recruitment and ­Employment Confederation, whose members found starting salaries rose in May at the fastest pace in three years.
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