Interest rates ‘should stay’ at 0.5% despite falling unemployment rates, the latest quarterly report by a leading economic forecaster has urged.
The EY Item Club has said that until real-term wages begin to grow, interest rates should be held down in order to avoid choking the recovery of the British economy.
A rapidly improving labour market will see the UK economy hit the Bank of England’s ‘Monetary Policy Committee’s’ unemployment threshold in the first half of the year, with unemployment falling below 7%. The report warns that the increasing workforce is likely to suffer weak growth in earnings, creating a ‘lopsided economy’, which would be further imbalanced by a rise in interest rates.
In its most recent quarterly report, the EY Item Club urged the Bank of England to re-consider its guidance policy, which says it will not raise interest rates until unemployment is below the stated threshold.
Peter Spencer, chief economic advisor to the 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.”
The EY Club believes short term economic recovery will continue to be driven by consumers and that UK GDP will grow 2.7% in 2014, up from 1.9% in 2013. In the future years however, we will need to look to ‘companies, not consumers’, as business investment will help make a more balanced economy.
Start-ups and small businesses are increasingly seeing positive news for 2014 and beyond, as more and more opportunities are opening up for businesses to once again be at the forefront of the strengthening British economy.