Wage growth in the United Kingdom has raised concerns which can cause inflation above Bank of England’s target. Dave Ramsden, the Deputy Governor, expressed his concern on Friday that growing wage pressures might impede inflation from returning to the bank’s target. He elaborated on the current state of wage growth in UK, noting that, even so, any rate cuts might not be too slow.
Surprising Wage Growth Data
Ramsden said it was a surprise that official data indicated private-sector wage growth had risen to 6.2% a year in Q4. Wage growth in the UK is surprisingly high. I would have anticipated this to soften. But the data shocked me with a rise. He called this a “worrying development.”
Also, Ramsden pointed out that BoE’s employer survey showed that employers expected wage growth for 2025 to be at the top end of earlier forecasts (2-4%). He had initially predicted a lower figure below 3%. Getting this sort of feedback, Ramsden changed his outlook on inflation. He expects that inflation may drop below 2% as a result of a late cycle deterioration in demand.
Monetary Policy and Rate Cuts
Ramsden voted for a cut of 0.25% in February bringing the main rate of the BoE to 4.5%. Yet, he recognized the fact that it was not unanimous. Two members of the Monetary Policy Committee (MPC) backed a bigger half-point cut. In December, when most in the MPC wanted to keep rates unchanged, Ramsden was part of the minority who wanted a smaller rate cut amidst concerns of wage growth in the UK.
A Gradual Path to Lower Rates
Ramsden thinks the costs will keep on going down, but rate cuts have to be well-approached. We must approach issues gradually and very carefully, he said. But, it does not mean the process must be a slow one, Ramsden noted. He pointed out that in some cases, the speed of rate cuts may need to quicken due to the ongoing wage growth in the UK.
Members of the MPC who supported rate cuts this month were divided in their expectations. Some were for a “careful” approach to future cuts whereas others may not be in favour of a more “cautious” stance.
Inflation Forecasts and Economic Risks
Most economists believe that inflation, which has come down to 3.0% level in January, is likely to touch 4% level. The BoE also has projected that inflation will rise to almost 3.7% by the third quarter. It also believes that inflation is likely to get back to 2% level by late 2027. Ramsden said he is firmly against inflation being above target but current weak growth in the UK economy suggests it will not meet even low demand. He warned that the economy may not be able to handle demand as well as the BoE thinks.
Implications for Inflation and the Labour Market
Ramsden stated that if the economy’s capacity is weaker than anticipated, it could lead to tighter labour market conditions for longer than expected. High wages may remain and lead to home inflation staying high. This situation, driven by wage growth in the UK, might hinder achieving the BoE’s target for inflation.
