Pay freeze “necessary” for economic recovery, says BoE

Bank of EnglandBusinesses should not offer pay rises despite current high inflation or they could risk damaging the UK’s economic recovery, the Bank of England (BoE) has warned.

BoE governor, Mervyn King, said that the current inflation rate of 3.7% (CPI) may increase to 5 % in the coming months, before dropping sharply in 2012. He cautioned employers against raising wages to counteract the effects of high inflation.

“The squeeze in living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.”

He added that if the Bank of England tried to counteract the rising prices by raising interest rates, it would simply lead to falling wages and therefore the same loss in purchasing power, but at the expense of an even deeper recession.

The Association of Chartered Certified Accountants’ head of taxation, Chas Roy-Chowdhury, agreed that employers shouldn’t add fuel to the fire of inflation by reverting to higher wages.

“This could lead to an unhealthy inflation spiral in the UK.”

“King’s comments are a clear warning not to add to this by overgenerous pay increases, mainly because the current inflation increases are probably quite short-term. They’ll probably work their way out once commodity prices stabilise or start reducing, and once the VAT increase falls out of the equation.”

However, HR Dept Ltd managing director, Sue Tumelty said: “Businesses aren’t going to freeze pay because Mervyn King says so – they’ll freeze pay if they can’t afford to do otherwise.

“Small businesses want to reward their staff for hard work – having a stressed workforce worrying about money doesn’t help,” she added. “Generally employers aren’t being as generous as they were because of the market conditions. And they aren’t having to pay extra to retain staff, because pay has gone down across the board.”

Pay freeze “necessary” for economic recovery, says Bank of England

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