Interest rates might be retained at their historic low of 0.5% for far longer than first expected, the Bank of England’s deputy governor has identified, in what will be welcome remarks to those suffering from the inflationary pressures of stagnant wage growth in the UK at present.
Jon Cunliffe argued that the below-inflation pay rises that many people in the country are currently being afforded, coupled with the slower than expected growth in the UK and global economy has meant that the Bank of England has developed a “cautious” stance towards instigating rate hikes anytime soon.
However, his controversial assertion that the global recession might have permanently suppressed and reduced pay will also ring alarm bells amongst the working class community of the country, which have consistently seen the actual value of their wages shrink every year since 2009, as the rate of inflation has outstripped wage growth.
Making a public speech in Cambridge, Sir Cunliffe said: “The softening in the pay and inflation data, together with the weaker external environment, for me implies that we can afford to maintain the current degree of monetary stimulus for a longer period than previously thought,” Sir Jon said in a speech in Cambridge.
Cunliffe is one of nine members in the Bank of England’s Monetary Policy Committee (MPC), who are tasked with shaping the strategy of the Bank and vote on a monthly basis about whether to raise rates or not.
The knight of the realm argued that the global recession had changed the landscape of employment forever; now functioning as an employer-centric environment in which employees have simply been resigned to consenting to low wages.
“The sharpness of the recession and the years of austerity that have followed it, appear to have caused a shift in the psychology of UK workers.
There appears, for the present at least, to be an acceptance that pre-crisis pay levels are no longer achievable,” he said.
Cunliffe avocation of retaining rates low – at least until that time that people are in a stronger financial position to cope with the higher monthly interest costs on their loans – echoes the sentiments of many of his MPC counterparts who have taken to the media to issue their support for keeping rates low for now.
Minutes from this month’s MPC meeting illustrated that they reached a majority vote of 7-2 to retain rates at 0.5%, with most members arguing that there was “insufficient evidence” of inflationary reasons to implement a rate hike.
The current consensus amongst economists is that the MPC will initiate the first rate hike in their base rate to 0.75% at some point after election time next year, with it appearing unlikely that policymakers will tamper with the country’s economy in the build up to the 2015 General Election next Spring.
“The likelihood of a near-term interest rate hike from the Bank of England is rapidly receding,” said IHS Global Insight chief UK and European economist Howard Archer.
This leaves around 8 months until the first hike is expected; an incredibly small time frame for the economists and politicians of the country to resolve endemic problems that are making it untenable to instigate hikes at the moment.
The problem with worker wage growth stems from a defect within the labour market in general; in an environment of enterprise, capitalism and money-making, it is unrealistic to expect that those who occupy the roles of employers will universally be prepared to raise their worker’s wages anymore than they have to. After all, it is this reality which has made people so pessimistic about getting a pay rise in the first place and has contributed heavily to the epidemic levels of poor pay acceptance.
When you factor in that policymakers have failed to protect consumers sufficiently from rising energy prices, housing shortages and poor treatment in the rental sector, you can see that the country is currently suffering and would simply not be able to cope with the added financial burden imposed on them from a hike in rates.
Cunliffe should be commended for publically supporting a policy which seems to be holding the fragile personal finances of the countries household’s together at present; a far cry from his political counterparts in 10 Downing Street who have seen living standards and wage growth regress, all to accommodate the success of their relentless obsession with bringing down the deficit.