February 24, 2018

British companies plan for minimum wage hike

15 February 2018, 08:19 | Hattie Nash

UK inflation holds at 3.0 per cent: Official data

Bank of England survey shows UK pay rises might finally be on the way

While the stickiness of inflation will make for itchy trigger fingers among rate setters at the Bank of England, the signs of the economy faltering suggest there's a risk of higher interest rates exacerbating a nascent slowdown.

According to the February update, private sector business leaders are expecting an average pay settlement rate of 3.1 per cent in 2018, compared with 2.6 per cent past year.

The data come on the heels of recent warnings from the Bank of England that interest rates may have to be hiked more aggressively than previously thought in order to control inflation, putting a May hike in play.

Bank of England survey shows UK pay rises might finally be on the way
Bank of England survey predicts better times for UK workers

Wage growth in Britain has been lacklustre since the financial crisis. The largest increases are planned in the service sector, where the highest number of people receives wages close to the minimum.

Britain's minimum wage for those aged 25 and over is due to rise by 4.4 percent in April to 7.83 pounds ($10.85) an hour, while pay for some younger workers will rise by over 5 percent.

The Central Bank report also shows that businesses feel pressure from higher mandatory pension contributions, increased inflation, the lack of foreign workers, and difficulties in recruiting and retaining staff.

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"Expectations that the Bank of England will raise interest rates in May will likely be fuelled by their regional agents reporting a pick-up in companies' expected average pay settlements", economist Howard Archer at consultants EY Item Club said.

The rate had hit 3.1 per cent in November, which was the highest level in nearly six years. The financial markets are even set for another rise before the end of 2018.

Mr Holman said: "We think the current speed limit of the United Kingdom economy is annual growth of around 1.5 per cent but our latest forecast suggests it is on track to grow a bit faster than that".

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A PMI index of price pressures constructed from indicators of input costs in manufacturing, services and construction, blended with the manufacturing PMI suppliers' delivery times index (which acts as a proxy for the amount of spare capacity in the economy), clearly highlights how price pressures have intensified in recent months, up to a level which is historically commensurate with tighter monetary policy.

"While we expect at touch softer reading of 2.9 percent y/y, we think that the core rate might inch higher by 0.1ppt to 2.6 percent y/y in January, which would support our thinking that a Bank Rate rise may now be likely in May", Daiwa Capital Markets commented in its latest report.

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