UK Interest Rate Hikes Might Be Stunted as Wages Rise: Expert Warns
The UK's central bank may not be able to lower interest rates as much as anticipated this year, according to Megan Greene, a key policymaker. Strong pay growth and potential rate cuts in the US could limit the Bank of England's ability to reduce borrowing costs, warned Greene during a speech in London.
Recent surveys suggest that employers are planning to hand out pay rises of 3.5% or more to their staff this year, according to Greene. This is concerning because strong wage growth can push up inflation if there isn't a corresponding rise in productivity. "I am certainly sceptical that productivity would rebound this year," she said.
The Bank of England's target for inflation is currently at 2%, but it reached 3.4% in December, up from 3.2% in November. This increase means that the UK's inflation rate remains higher than expected.
Greene also warned that if the US Federal Reserve lowers rates more aggressively than the Bank this year, it could cause a rebound in demand for UK exports, leading to upward pressure on UK inflation. As a result, interest rate cuts might be limited.
In related news, a separate report from the Bank of England found that its models had underestimated the full effects of the energy price shock of 2022 due to Russia's invasion of Ukraine. The report acknowledged that the bank had consistently forecast lower inflation and wage growth than was actually observed.
Meanwhile, a survey of UK businesses reported a sharp rise in costs, with the overall pace of inflation unchanged from December's seven-month high. Companies attributed this increase to elevated wage pressures, alongside rising transport bills and raw material prices from suppliers.
These findings have led City economists to reduce their expectations of the Bank making two interest rate cuts this year, with the first quarter-rate cut now not expected until June.
The UK's central bank may not be able to lower interest rates as much as anticipated this year, according to Megan Greene, a key policymaker. Strong pay growth and potential rate cuts in the US could limit the Bank of England's ability to reduce borrowing costs, warned Greene during a speech in London.
Recent surveys suggest that employers are planning to hand out pay rises of 3.5% or more to their staff this year, according to Greene. This is concerning because strong wage growth can push up inflation if there isn't a corresponding rise in productivity. "I am certainly sceptical that productivity would rebound this year," she said.
The Bank of England's target for inflation is currently at 2%, but it reached 3.4% in December, up from 3.2% in November. This increase means that the UK's inflation rate remains higher than expected.
Greene also warned that if the US Federal Reserve lowers rates more aggressively than the Bank this year, it could cause a rebound in demand for UK exports, leading to upward pressure on UK inflation. As a result, interest rate cuts might be limited.
In related news, a separate report from the Bank of England found that its models had underestimated the full effects of the energy price shock of 2022 due to Russia's invasion of Ukraine. The report acknowledged that the bank had consistently forecast lower inflation and wage growth than was actually observed.
Meanwhile, a survey of UK businesses reported a sharp rise in costs, with the overall pace of inflation unchanged from December's seven-month high. Companies attributed this increase to elevated wage pressures, alongside rising transport bills and raw material prices from suppliers.
These findings have led City economists to reduce their expectations of the Bank making two interest rate cuts this year, with the first quarter-rate cut now not expected until June.
i feel like the financial uncertainty is really affecting people's mental health and overall well-being 
i mean, they're already dealing with rising costs and wages, and now it seems like interest rates might not go down as much as expected? that just adds to the anxiety 
what's worrying me most is how this could affect ppl who are already living paycheck to paycheck or struggling to make ends meet 
i hope the banks and experts can find a way to balance inflation and wages so it doesn't hurt anyone too much 
The thing is, I think wages are already having a big impact on inflation. I mean, 3.5% pay rises are crazy for most people, and it's only gonna make things harder for the bank to control costs. They're saying productivity won't catch up with wage growth, but how can that be when everyone's struggling to afford stuff? We need some real help here, not just a few tweaks to interest rates... 
. The whole inflation thing is getting a bit out of hand and we need to see some serious growth in productivity to bring those rates down 
. I'm also kinda intrigued by this energy price shock report - did they really underestimate it that badly? 
but come on, can't we just chill out about inflation for a sec? 
I mean, 3.5% pay rises sound nice and all, but don't they know that's like, totally not sustainable? 
.
It was like, one of those moments where you're just like, "Uh, what just happened?" 
I remember my grandma being like, "How am I supposed to afford milk now?" 
and I'm over here like, "Grandma, it's just the economy, it's not personal" 
.
It's like, how do you even prepare for a global crisis in your econ models? 
. It's kinda worrying 'cause strong wage growth can make inflation go up if productivity doesn't catch up 
If they lower rates too much, it could cause a rebound in demand for UK exports, which would just push up inflation again. It's like a never-ending cycle of boom and bust.
.
. If wages are gonna rise so much it's like, hard for rates to go down at all. Like, if people get 3.5% raises, that's straight cash in their pockets 
. Greene's right, productivity hasn't exactly been on fire lately 
. and if the US Fed is lowering rates more aggressively than us, that could be a problem for UK exports 
. I'm not saying we'll see a complete halt in interest rate cuts, but maybe not as much as we were hoping 
. I mean, think about it, if wages are rising that fast, that means more money is being spent... and more money = more demand, which = higher prices 
. They're not gonna let us have a break from inflation anytime soon, mark my words 
. wages are on the rise, but productivity isn't keeping pace 
. if the us federal reserve starts cutting rates aggressively, that could be a problem for the uk 
... and with business costs rising, interest rate cuts might not happen as much as we think 
about these interest rates. I just know my mortgage payments are gonna go up and it's gonna be a real challenge for people on tight budgets. And what's really worrying me is that wages aren't keeping pace with inflation. I mean, I get it, employers can only do so much, but 3.5% pay rises might not even be enough to keep us ahead of the curve.
it's just not good news for anyone who's trying to save money or invest. It feels like we're stuck in this never-ending cycle and I'm just waiting for someone to come along with a solution. Fingers crossed, though 
where the characters just keep gettin' richer while everyone else struggles to make ends meet. I mean, don't get me wrong, folks need a decent wage, but this is like, exponential growth or somethin'!