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UK workers too cautious to ask for pay rises, says new Bank of England guru Dave Ramsden

Sir Dave Ramsden voted against this month's interest rate hike because wage growth is showing no signs of picking up - Bloomberg
Sir Dave Ramsden voted against this month's interest rate hike because wage growth is showing no signs of picking up - Bloomberg

Britain’s workers have been afraid to ask for pay rises for the past decade and economic uncertainty from Brexit has encouraged them to stay flexible, according to new Bank of England rate-setter Sir Dave Ramsden.

This “increased flexibility” on pay is one reason why Sir Dave voted to keep interest rates on hold this month, when the majority of the Bank’s Monetary Policy Committee voted voted to hike rates.

It is possible that “since the referendum workers have responded to uncertainties about the outlook by showing even more flexibility in their wage demands,” the former chief economic adviser to the Treasury said.

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“People’s willingness to accept lower real wages would encourage firms to hoard labour, and shift away from capital expenditure for more labour input for a given unit of output,” he said, explaining why unemployment has fallen sharply and pay growth has stayed low even as companies have held off making big investments.

Traditionally, economists would have expected wage growth to pick up now that unemployment is down at 4.3pc, a 42-year low.

The new deputy Governor at the Bank told an audience at King’s College London that Brexit uncertainty is likely to be one factor holding back wages and this has the knock-on effect of restraining domestic inflationary pressures, meaning the recent pickup in imported inflation is not likely to spread to higher longer-term inflation.

Combined together, those factors are the reason why Sir Dave wants to hold off raising interest rates until there are real signs of domestic wage and price rises.

"[Sustained weaker pay growth] would mean there is a little more room than headline measures of slack suggest for the economy to grow without generating above-target inflation in the medium term,” he said.

“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.”

Sir John Cunliffe also voted to hold rates. Mark Carney and the six other members of the MPC voted to hike the base rate to 0.5pc on the basis that inflation needs to be brought under control.

Meanwhile the Chancellor has approved a Bank of England request that it be allowed to extend the Term Funding Scheme to £125bn, from its previous limit of £100bn as the Bank will soon reach that level.

The scheme is due to run until February and the Bank does not want to shut it off prematurely simply because it has been widely used by banks. The TFS injects cheap funds into banks, and is indexed to the base rate.

If its cap was not lifted, it could mean banks losing a useful source of cheap funds at the same moment as the base rate rises, potentially creating an unexpectedly large rise in market rates at a sensitive moment, which the Bank does not want to do.