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Carney may not wait for wage growth to lift rates

The Bank of England will not necessarily wait for real wages to actually rise before raising interest rates, governor Mark Carney has said, stressing that BoE's focus is on the underlying trend.

Last week, the BoE said it would be putting "particular importance" on the prospective paths for wage and labour costs, as it slashed its earnings growth forecast for the year to just 1.25 per cent.

Read MoreBoE tempers rate hike expectations on weak wages

Mark Carney
Simon Dawson/Bloomberg | Getty Images
Mark Carney

While the UK has continued to create jobs at a rapid pace, wage growth has been anaemic and last week declined for the first time in five years.

This weakness has now become an important element of the BoE's judgment that there still remains room for the economy to grow without generating inflation.

Read MoreBoE eyes wage growth in rate hike riddle

In a newspaper interview, Mr Carney stressed that this focus did not necessarily mean that the BoE would need to see official figures for average wage growth actually rise, countering some critics who had expressed concern the BoE was focusing on a backwards looking indicator.

Instead Mr Carney emphasised the important judgment was on the trend, or path, in wage growth.

"We have to have the confidence that real wages are going to be growing sustainably [before rates go up]. We don't have to wait for the fact of that turn to do so," Mr Carney said in an interview with the Sunday Times.

Financial markets have pushed their bets on when interest rates will rise back to February next year on the increased emphasis on wages. But Wednesday's inflation report also said that the level of slack in the labour market – room for non-inflationary growth – is being used up at a faster rate than expected previously, noting there were a "wide range of views" on the MPC regarding how much slack remains.

Read MoreECB 'won't move a muscle' despite inflation fears

This has led to speculation that one or two members of the MPC are readying themselves to vote for an interest rate rise, as they believe the risks of domestically generated inflation are increasing. The minutes of the August meeting, released this week, will be closely scrutinised for more details of whether dissent is developing and if any members have yet voted to increase.

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Mr Carney in the interview hinted that the time for a split vote was nearing, saying that while the committee is united that rate increases will be limited and gradual, "people might have different views on the exact timing".

The last time there was a split vote on raising rates was July 2011, when two members voted for a quarter-point increase.

In the interview, Mr Carney reiterated his stance that while the economic recovery is in train – saying "we are more than halfway towards that finish line" – there are still substantial weaknesses.

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"The easy bit of the expansion has happened," Mr Carney said, adding: "Now we are coming to the tougher part where you ultimately have to see productivity pick up, real wages pick up, sustainable consumption and export competitiveness return. That's what we are providing guidance for now."

Low pay has risen up the political agenda as all three parties consider ways to appeal to "blue collar" voters who have seen a continued squeeze on their standard of living since the recession.

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