Wage pressures threaten inflation target, says King

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The Independent Online

The rising level of the national minimum wage is forcing up businesses' pay bills for the first time, the Governor of the Bank of England said yesterday.

The rising level of the national minimum wage is forcing up businesses' pay bills for the first time, the Governor of the Bank of England said yesterday.

Mervyn King said rising wage pressures, together with signs of price pressures from UK factories, were the key upward risks to the Bank's inflation target.

But he offset the hawkish tone of his comments on the labour market, saying consumer spending had slowed "quite markedly" both in the three months before Christmas and so far into the new year. "We are in a delicate position," Mr King told MPs on the Treasury Select Committee.

His comments, which were backed by four other Bank officials before the committee, were seen in the City as a sign that the Bank's Monetary Policy Committee would leave rates unchanged at next month's meeting. But he rejected arguments put forward by the retail sector that consumer confidence and spending were weak enough to justify a rate cut.

Howard Archer, the chief UK economist at the analysts Global Insight, said: "An interest rate cut is unlikely to happen in April. There is little indication that any of the members who voted to leave rates unchanged in March are about to imminently change their mind."

On the labour market, the Governor said there had been a "small upward" shift in pay in recent months. "It is fair to say that over the last year I have heard more comments on the impact of the minimum wage from employers - markedly more," Mr King said. "It is having an impact and employers are beginning to say this is affecting settlements for pay above the minimum wage who are trying to restore their [pay] differentials."

He said annual pay growth in the hotel and restaurants sector, which accounts for vast numbers of low-wage posts, was running at 6.8 per cent.

But Marian Bell, one of four external MPC members, said the record levels of employment combined with low wage inflation was one of the "most striking" developments of recent years. "When I speak to businesses there's greater flexibility that they have to meet shortages by allowing flexible working patterns for women with children," she said.

Mr King added that the 130,000 workers who have come from Eastern Europe in the eight months since EU enlargement were "not trivial" in keeping wages under control.

All the MPC members before the committee, which also included Richard Lambert, Steve Nickell and Paul Tucker, said the path for consumer spending was a key risk.

Mr King said: "At least in the near term, the pace of consumer spending has slowed quite markedly from what it was and what we thought it was going to be. It looks as if both in the fourth quarter of last year and again in the first quarter of this year that consumer spending will not be growing at anywhere near the rate that it was."

Mr Lambert said: "Consumer spending had slowed in the fourth quarter and as far as we can tell it has remained rather fragile in the early months of the year."