Brexit fears have triggered pay restraint, Bank of England official suggests

Britain’s unusually weak pay growth could be caused by workers reining in their demands due to Brexit uncertainty, a senior Bank of England official has said.

In his first speech since joining the Bank from the Treasury, Dave Ramsden said the impact of the EU referendum on inflation had persuaded him to vote against an increase in interest rates earlier this month.

Seven out of the nine members of Threadneedle Street’s monetary policy committee backed raising the cost of borrowing for the first time in more than a decade, pushing the bank rate up from 0.25% to 0.5%.

But Ramsden, one of the Bank’s deputy governors, said that workers were showing pay restraint even though unemployment had continued to fall and currently stood at a 42-year low of 4.3%.

The decade since the start of the financial crisis has been marked by historically weak growth in earnings, but Ramsden said it was possible that “since the referendum, workers have responded to uncertainties about the outlook by showing even more flexibility in their wage demands.”

He told an audience at King’s College, London: “At the margin, the idea that workers are responding to Brexit by showing increased flexibility could mean that is more room than headline measures of slack suggest for the economy to grow without generating above-target inflation in the medium term.

“For that reason, in our November meeting I was willing to wait for more evidence on the evolution of wage and domestic cost growth before beginning to withdraw some monetary stimulus. So I voted for no change in bank rate.”

Ramsden said the profile of the economy since the referendum had been saucer-shaped and it was likely that the UK would remain in the flat part of the saucer for some time. The Bank’s forecast of 0.4% growth each quarter over the next three years would leave it 2% smaller by 2020 than envisaged in its last pre-referendum forecast.

“The biggest risk I see to that outlook for demand is around the resolution of the current uncertainty about our eventual trading arrangements and the path that will be followed to reach them.

“Were that uncertainty to be lifted, I can see a case why UK whole economy demand could grow more strongly, more in line with, for example, recent manufacturing indicators. Equally, were uncertainty to persist at current levels or even increase further, I could see a case for demand growth, and in particular investment growth, being weaker.”

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