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Timing of interest rate rises uncertain

With the UK unemployment rate falling rapidly, it might seem that interest rate increases are just around the corner, but low wage inflation has made it quite hard to predict when the Bank of England will act.

Rob Wood, an economist at Berenberg bank, has said:

“The UK labour market is really shifting now as the economy strengthens and confidence surges. No wonder consumers’ fears of job loss are the lowest in 16 years. These data back up our call that the Bank of England (BoE) will hike rates in November 2014.”

Wood has added that he considers the decline in wage inflation to be a temporary phenomenon. This is because he has highlighted the fact that pay in the financial sector was affected by a change in taxation policy last year. However, not everyone agrees with his analysis.

Expert John Philpott has suggested that wages have been disappointing outside the financial sector. He has argued that the rise in employment has not brought much relief inside the workplace. His perspective implies that interest rates may be raised at a later date than Wood has advised.

However, it has been made clear by policymakers that interest rate increases are likely to be gradual; hence, owners of property can have some faith in the stability of the national economic recovery. Therefore, more people may choose, for instance, to buy hardwood flooring in North Wales, have extensions built, or make other long-term investments in their properties.

The economist Ross Walker has pointed out that the different data has given Mark Carney room for manoeuvre. This must be positive for the prospects of the UK.

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