Interest rates 'should stay' at 0.5% says Item Club

 
The Bank of England The EY Item Club says wage growth should be evident before a rate rise

Interest rates should be held at 0.5% until squeezed real-term wages begin to grow - to avoid choking the recovery, a leading economic forecaster has said.

The EY Item Club urged the Bank of England to bolster its guidance policy which says it will not consider a rate rise until unemployment falls to 7%.

This was likely to be met in 2014 - two years earlier than expected, it said.

But wages remained subdued, it warned, urging the Bank to factor this into its policy pledge.

In its latest quarterly report into the health of the UK economy, the EY Item Club said raising interest rates too soon, before "real wages" had shown an improvement, could risk "choking off the fragile consumer-led recovery."

The BoE policy whereby an unemployment figure is regarded as a target is known as forward guidance. The governor of the Bank of England, Mark Carney, set out a forward guidance strategy to accompany his first inflation report in August of last year.

But policy makers have stressed the 7% threshold is not an automatic trigger, and will instead simply mean a rate hike can be considered - while taking other key factors into account.

The EY Item Club report predicts that unemployment will fall below 7% in the first half of 2014, but that wages will grow only 1.8% in 2014, before rising by 2.7% in 2014, and 3.5% the year after.

'Spending sprees'

The group adds that the BoE Monetary Policy Committee, which sets interest rates, should supplement a forward guidance threshold with an additional measure of wage growth - it also says the 7% unemployment marker should be lowered.

A shopping centre in the UK UK consumer spending has boosted the economy

Peter Spencer, chief economic advisor to EY Item Club said: "It is hard to find another episode in time where employment has been rising and real wages falling for any significant period of time. The weakness of real earnings is proving to be the government's Achilles heel and could prove to be the weak spot in the recovery.

"Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt to income ratio."

The EY Item Club view is shared by a number of economists.

Earlier this month in a snapshot of opinions of the UK's top economists from the BBC, an overwhelming majority - 93% of the 28 economists polled - said they thought rates would still be 0.5% at the end of 2014, with more than half predicting the first rise in the second half of 2015.

More than 40% believe unemployment will fall to 7% in 2014, from 7.4% now.

On the economy as a whole, the EY Item Club said consumers would continue to propel growth, and that UK GDP would expand 2.7% in 2014 - up from 1.9% in 2013.

Consumer spending, despite slow wage growth has been regarded as a driving force for the UK economy in the past 12 months.

 

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  • rate this
    -3

    Comment number 405.

    396.Suki
    But, if rates rise, the property bubble would bust. If the market is allowed to purge this malinvestment, free from government intervening, we'd be back on track quickly (see Depression of 1920 that was over in a mere year).

    This would mean that property prices would plunge, making purchase and or home construction far cheaper for all. Plus, you get a return on your savings too :)

  • rate this
    +11

    Comment number 404.

    At the last Autumn Statement: I didn’t hear any thanks, praise or hint of a reward to savers who got mugged to prop up the banks & phoney housing market

    George Osborne was trying naïvely to woo & appease the builders, estate agents, BTL Landlords & similar ilk --- He tended to forget that SAVERS ARE VOTERS TOO and there are millions of disgruntled ones

  • rate this
    -1

    Comment number 403.

  • rate this
    +2

    Comment number 402.

    @391.newageoracle
    And it would be very unfair to everyone under the age of 40 who is struggling to get onto the property ladder because the previous generation either bought up, or allowed to be bought up all the properties, pushing property prices and rental costs to unaffordable levels.

    Low interest rates or high interests - someone loses out.

  • rate this
    +3

    Comment number 401.

    The economy is stuffed, most of the wealth resides in the hands of a very few people who are able to do more or less as they please - and they will continue to manipulate the system to their advantage.
    Two or three of these people could have a conversation and decide to use their wealth to put an end world poverty at a stroke.
    Will they do that voluntarily do you suppose?

  • rate this
    -1

    Comment number 400.

    390 Etienne
    Provision of housing by the state (or local government) depends on the amount of money available to build them. Either income tax or council tax would have to rise to enable more houses to be built - or builders would have to reduce their costs. Houses aren't built speculatively much these days or you end up like Ireland did.

  • rate this
    +2

    Comment number 399.

    Funny, well not really, how I was taught that capitalism is a mechanism that sorts itself out. Well it does until it looks like banks are failingl then dictatorship comes in run by guess who?

  • rate this
    +11

    Comment number 398.

    Low interests are here to stay! A housing bubble crash would happen if they went up significantly. Savers and pensioners loose out, but in other ways the government is accused of being soft on pensioners. Savers are therefore encouraged to spend, and by doing so, they stimulate the economy. The very rich invest elsewhere and never loose out anyway. I sadly look on the low interest as a tax!

  • rate this
    +6

    Comment number 397.

    394.Frank Bough
    Here here!

    Wanting a roof over my head - how dare I!
    Traveling to work?! Ridiculous!
    Food?! Don't be silly!

    It's getting like Monty Python Yorkshiremen sketch in here...

  • rate this
    +14

    Comment number 396.

    An interest rise would give me a little return on my savings and make life a bit easier for me but my daughter, who has a large mortgage, would be in trouble. There is no doubt that we would see a huge rise in homes being repossessed and as there are not enough council properties where would the homeless be housed.

  • rate this
    +6

    Comment number 395.

    @360
    nicknack1

    "I'd like to know if people buying houses today... will be able to afford it when interest rates rise"

    I bought in November, we're overpaying by over 58% (luckily my mortgage allows that) I've been saving for years to buy waiting for the market to normalise but jumped from fear of another bubble forming, my old rent = my current mortgage +capital. It felt damned if we do or don't

  • rate this
    0

    Comment number 394.

    Thank goodness this countries fiscal policy is not decided by the self-interested view widely represented on this board today. A frankly shocking level pomposity abounds.

  • rate this
    +2

    Comment number 393.

    The 'recovery' is in the greater part based on consumer spending, we are truly bumping along the bottom, a small rise in interest rates will kill any hope of a proper recovery. As to savers, yes I feel sorry for them, but like the rest of us they're are having to take the pain of successive governments mismanagement, which is still going on.

  • rate this
    +1

    Comment number 392.

    lets change the goalposts again we haven't had our nose in the trough long enough .

  • rate this
    +4

    Comment number 391.

    It is very unfair on those pensioners who worked hard all their lives and saved a nest egg (now dwindling) to provide for their old age so as not to be a burden on their children. As one of them, I try to be philisophical, accepting our generation is having to pay for decades of irresponsible fiscal policies and profligate government/personal spending. The BofE is right but the medicine is nasty

  • rate this
    0

    Comment number 390.

    The worst problem in the UK is debt, both Government debt and personal debt are running at all time highs. We could all be in deep doodoo if/when interest rates start to creep up. Then we will be back to falling equity in housing and rising interest payments. Far too much debt is tied up in housing because of the Governments failure to tackle the supply side of the housing market.

  • rate this
    0

    Comment number 389.

    Patently obvious the members of this EY Item Club do not hold any money in depoit savings account.

    Patently obvious that any increase in interest rates would cause another recession and the property asset bubble to burst.

    We just add another band aid to out monetry system by keep interest rates low.

  • rate this
    +8

    Comment number 388.

    Is anyone else concerned that this recovery seems to be fuelled on debt? The news states that the recovery is on the way, inflation in low and the garden is rosy. But..... the only reason inflation is 2% is because of pocketed hyper inflated saleries for few, spending it on houses in the south east and London.

  • rate this
    -3

    Comment number 387.

    368.nagivatorjan
    Agreed. Tell our MPs that. I guess there's no votes in being frugal. If the people can vote themselves benefits at the expense of others, they will.

    Do you mind if I ask, where/what form do you put your money?

    373.Sally (correction)
    366.DaveM
    'We' must end...

    "Choice in Currency" - Friedrich A. Hayek
    http://mises.org/document/3983

  • rate this
    -2

    Comment number 386.

    {Tongue in cheek ;-)}

    It is a good idea to keep interest rates low.
    This will help new immigrants get onto the housing ladder now that Housing Benefit is going to be unavailable to them.

    or will they set up more residences in doorways, garage forecourts and beneath bridges.
    http://www.express.co.uk/news/uk/453586/Immigrants-sleep-rough-with-babies-on-Park-Lane-in-near-freezing-temperatures

    Mmm

 

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