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Low pay settlements to keep interest rates stable

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The Monetary Policy Committee (MPC) will hold off from raising interest rates due to the low level of pay increases seen across the UK, according to a leading economist.

Figures released by IDSPay.co.uk, an income data services firm, show that the 61 per cent of all private sector pay deals concluded in the three months to March 2011 were in a range between two and three per cent inclusive, and the average was 2.6 per cent.

Vicky Redwood, Senior UK Economist for Capital Economics, believes that due to the low level of pay hikes and increasing cost of living the MPC will be unlikely to increase interest rates any time soon.

The MPC will announce its decision for this month’s interest rate later today, with many retailers hoping that it will not rise above its historic low of 0.5 per cent, as this would further affect consumer spending.

Redwood said: “The latest news on pay settlements provides a further reason for the MPC to hold off from raising interest rates later today.

“We still think that the large amount of slack in the labour market will keep wage growth firmly contained even in the face of further rises in inflation.”

In the IDSPay survey, all of the retailers featured offered below the average rate of pay rises to its employees during the period, with Marks & Spencer and Waitrose the most generous offering an increase of as much as 2.5 per cent.

Argos was the only retailer to freeze pay, John Lewis and Next offered just over one per cent, whilst Boots, Tesco, Sainsbury’s, B&Q, Asda and Wilkinsons gave its employees more than two per rises in pay settlements.

With pay not keeping up with the rising cost of living the MPC will not risk adding raised interest rates to household worries and the situation is unlikely to change in the near future.

“Households’ near-term inflation expectations fell in April, while unemployment is still close to eight per cent,” Redwood continued.

“We have also pointed out before that during past wage-price spirals, pay growth began to pick up within a few months of inflation starting to rise. But inflation has been above its target for well over a year now.

“The fact that pay growth has barely budged supports our view that interest rates will stay very low for a prolonged period yet.”

Published on Thursday 05 May by Editorial Assistant

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