UK Interest Rates Will Rise if Wages and Productivity Fail to Match Says BoE Official

The Bank of England deputy governor has warned that the central bank will be forced to hike interest rates soon if wages fail to increase in tandem with productivity.

According to Nemat 'Minouche' Shafik, in an interview with the Yorkshire Post newspaper, the central bank will have to bump up rates from its record low of 0.5% in order to stimulate pay packets.

"If wage increases are expected, but productivity is performing well we can wait for longer; if those wage increases are not accompanied by productivity increases, then I think we will have to move more quickly on rates because inflationary pressures will build up," said Shafik.

"I think that's the key choice that we face."

The UK economy is growing faster than expected at 3.2% but wages are still moving up at a slower rate compared with inflation.

The Office for National Statistics (ONS) said total pay growth was just 0.7% in June 2014, well below price inflation of 1.9% - meaning wages are in real terms decline.

Meanwhile, one in five workers in the UK – more than five million people – are categorised as being on low pay, defined as wages of less than £7.71 an hour.

There has also been a significant rise in self-employment which has meant many are on lower wages due to being forces to work for themselves after the recession.

In August, the National Institute for Economic and Social Research (NIESR) said questions remain over the so-called "productivity puzzle", with a robust labour market but weak output per worker.

"The labour market continues to perform very strongly. Total employment is more than 4% higher than it was at the start of 2008, and the employment rate has returned to its 2005 peak," said the NIESR.

"We remain optimistic about further job creation and expect unemployment to fall below 6 per cent later this year, and real wages to begin to rise gradually.

"The productivity performance, therefore, remains abysmal. With output per hour worked still around 4.5% below the pre-crisis peak, we expect pre-crisis productivity levels to be regained only in the latter half of 2017– although, given the continuing puzzle about the causes of poor productivity performance, large uncertainties remain."

However, Shafik said in the interview: "The recovery is encouraging. The real question is how can we make this recovery sustainable."

"We don't want to take risks with this recovery. It's been a long recession and I think that's going to be the biggest challenge going forward," she added.