A rapidly improving labour market will see the UK hit the Monetary Policy Committee’s unemployment threshold two years earlier than expected, according to new research.
The latest quarterly forecast from the EY ITEM Club, however, warns raising interest rates too soon, before real wages have also begun to improve, could risk choking off the fragile consumer-led recovery.
It forecasts unemployment will fall below seven per cent in the first half of the year, amid an improving economic outlook and a surge in demand for labour.
However, EY ITEM Club says that the swelling workforce is likely to suffer weak growth in earnings, with wages set to grow by only 1.8 per cent this year, before slowly picking up to 2.7 per cent in 2015 and 3.5 per cent in 2016.
The report is calling for the MPC to urgently supplement the forward guidance threshold to include positive growth in real wages alongside a lower threshold for unemployment.
The forecast also warns that a more balanced economic recovery through business investment and exports will be crucial before a rate rise is considered. The EY ITEM Club forecasts the first interest rate hike in the autumn of 2015.
Sara Fowler, EY senior partner based in Birmingham, said: “The challenges on the labour front will become a real pressure point for business, with a war for talent in high growth areas such as the construction, professional, technical and scientific services. At the same time, a changing demographic and later retirement will represent an unforeseen challenge for managing human capital.”