Concerns about real-terms wage growth are expected to keep the base rate on hold this week, as the debate rages on about when the Bank of England will opt to raise the cost of borrowing.
The Bank’s nine-strong Monetary Policy Committee (MPC) will meet on Wednesday and Thursday for its monthly gathering.
Although signs of a sustained economic recovery continue to be witnessed in the UK, it is widely thought that no change will be made to the base rate during the August meeting.
While some policymakers on the committee have expressed support for a rise in the base rate sooner rather than later, most analysts do not believe an increase will be voted through until the end of 2014 at the earliest.
The 0.5% rate – which marks an historic low – has been used in tandem with quantitative easing (QE) to try to kick-start a recovery in the wider British economy.
With QE now firmly on the backburner, questions have also been raised about when the Bank may be forced to end its policy of ultra-low interest rates.
The country’s overall Gross Domestic Product reading recently climbed back to its pre-recession peak. This has increased the pressure on the Bank to consider raising borrowing costs from their current emergency levels.
Investors have been keen to scrutinise the minutes of recent MPC meetings. The documents show that over the last few months, committee members have become “more balanced” in their attitudes about raising the base rate.
In July, certain members of the group even suggested that an early rate rise experiment could be considered, to assess the economy’s ability to cope with slightly higher borrowing fees.
However, other committee members said the economic recovery might be jeopardised by a sudden jump in interest rates when wage growth remains weak.
Real-terms pay rates continue to struggle to match inflation, with official statistics recently indicating that annual wage rises have narrowed to 0.3%.
An inflation reading of 1.9% means many workers in the UK are enduring a real-terms squeeze.
Mark Carney, the governor of the Bank, has previously suggested that the MPC is keen to focus on how improving employment figures will be converted into “real wage growth”.
Source: Investec
