‘Wages will not keep up with prices’ warns BoE chief Carney

Mr Carney said this would be a tough year in terms of pressure on household finances
Mr Carney said this would be a tough year in terms of pressure on household finances

Bank of England governor Mark Carney has warned the squeeze on households has begun as Brexit-fuelled inflation outstrips wage growth.

Mr Carney said consumers were beginning to feel the pinch as the pound’s plunge since the Brexit vote has pushed up prices.

“This will be a more challenging time for British households over the course of this year,” he cautioned.

The gloomy comments came as the Bank kept interest rates on hold at 0.25% and nudged down its growth forecast to 1.9% for 2017 from 2% in February, cautioning that a “slowdown appeared to be in train” after a sharper-than-expected fall in consumer spending.

Growth slowed sharply to 0.3% in the first quarter of 2017 from 0.7% in the previous three months.

The Bank said, while it expects first-quarter expansion to be revised higher to 0.4%, the economy would likely continue at a “similarly moderate pace of growth in the second quarter and beyond”.

The pound fell on the growth cut, down 0.4% at $1.29 and 0.4% lower at y1.19.

But the Bank said this year would be the worst for the pressure on household finances, with wage growth set to pick up over the next three years, while the wider economy will also strengthen.

Mr Carney said: “Wages are still growing and we expect the pace of growth will accelerate as this year progresses and continue into 2018 and 2019. Real income growth will return.”

The report, released alongside the rates decision, also offered some cheer for the growth outlook as forecasts were raised to 1.7% for 2018 and 1.8% in 2019 from February’s prediction for 1.6% and 1.7% respectively.

The Bank said growth would be supported by a recent recovery in business investment and higher exports amid a bounce-back in the global economy.

While inflation, currently at 2.3%, would likely peak at close to 3% in late 2017, the Bank said the pound’s gain since the General Election would help inflation ease back in 2018 and 2019.

But Mr Carney stressed the forecasts were based in part on “the adjustment to the UK’s relationship with the EU being smooth”, with expectations the Government will introduce a transition period to avoid a cliff-edge departure from the single market.