Wadhwani warns growing pressure on wages may lead to MPC rate rise

SUSHIL WADHWANI, a member of the Bank of England's Monetary Policy Committee, warned yesterday of growing wage pressure in the UK economy, suggesting further interest rate rises may be on the way.

Delivering a lecture to the National Council of Applied Economic Research in New Delhi, Dr Wadhwani said that despite evidence that increased competition had depressed prices in some sectors, real earnings growth in the UK this year had been higher than in previous years.

"One benign explanation of the rise in real wages is that it has arisen because of inflation coming in rather lower than had been expected. Nevertheless, there is evidence of growing skill shortages and recruitment difficulties," Dr Wadhwani said.

"Notwithstanding the evidence on price wars in retailing ... perhaps because of growing wage pressure, some forward-looking survey indicators of prices have turned up in the services sector. Hence it is perhaps, not surprising that, in recent months, the MPC has felt it appropriate to raise interest rates by 25 basis points on two occasions in the spirit of early pre-emptive action; suggesting that the committee, at least, does not believe inflation is dead."

The MPC had explicitly allowed for a reduction in structural price-cost margins to reflect a likely intensification of product market competition arising from factors such as the Internet. However, this did not, he said, preclude inflation rising to the 2.5 per cent target level at the end of two years.

In many countries, he explained, there are signs that the so-called non-accelerating inflation rate of unemployment (Nairu) - the rate of unemployment consistent with stable prices - has been falling.