Persistent wage growth pressures are risk keeping inflation well above the Bank of England's 2 per cent target, the bank's deputy governor has warned. Dave Ramsden told the Bureau for Economic Research at South Africa’s Stellenbosch University on Friday that recent data on wages was a 'concerning development' for policymakers.
Private sector wages in the UK expanded by 6.2 per cent in the three months ending December 2024, according to the Office for National Statistics (ONS). The increase was far higher than the UK inflation rate, which jumped from 2.5 per cent in December to a greater-than-expected 3 per cent last month amid rising food prices and VAT on private school fees.
Ramsden also highlighted a recent BoE survey revealing that employers expected average pay to grow by 3.7 per cent this year, up from previous predictions of below 3 per cent. From April, the National Living Wage will increase by 6.7 per cent to £12.21 per hour, while the minimum wage for 18 to 20-year-olds will go up by 16.7 per cent to £10 per hour.
Warning: Dave Ramsden told the Bureau for Economic Research at South Africa’s Stellenbosch University that recent data on wages was a 'concerning development'. At the same time, employers' National Insurance contributions will be levied at 15 per cent on staff salaries exceeding £5,000 instead of the current 13.8 per cent rate on wages above £9,100.
Many prominent retailers have warned that the measures will force them to hike prices, dampening the BoE's plans to ease inflation and cut interest rates. At the latest BoE monetary policy committee meeting on 6 February, Ramsden was one of seven members to vote for reducing the base rate by 0.25 percentage points to 4.5 per cent.
The one-time chief economic adviser to HM Treasury is considered one of the more dovish members of the committee; he was one of three policymakers to support a rate cut at the previous MPC meeting in December. Yet the chances of a further reduction in the coming months appear distant; the BoE expects inflation to hit around 3.7 per cent in the third quarter, and some economists forecast it hitting 4 per cent.
But despite these predictions, which are partly influenced by the energy price cap's upcoming 6.4 per cent rise from April, Ramsden thinks the 'disinflationary process remains intact.'. 'Given the increased uncertainty and risks to inflation on both sides...I am even more certain than I was that taking a gradual and careful approach to the withdrawal of monetary restraint is appropriate,' he said.
'This means judging the evidence afresh at each meeting to ensure the MPC sets monetary policy to meet the 2 per cent inflation target sustainably in the medium term.'. He added: 'A gradual and careful approach is always needed on the way down a mountain to ensure a safe descent and a successful outcome. But that doesn't always mean the descent has to be slow.'.
