Europe News

Bank of England holds fire as wage growth lags

The Bank of England left its benchmark interest rate unchanged as expected on Thursday, as wage growth and productivity remained surprisingly weak, lagging the country's economic recovery.

The U.K. central bank's nine-member Monetary Policy Committee left the bank's main interest rate at a record low of 0.5 percent and the total size of its bond portfolio at £375 billion ($617 billion) after their October policy meeting.

Read MoreFirst alarm bells for UK economy as rate hike looms

Mark Carney, governor of the Bank of England.
Simon Dawson | Bloomberg | Getty Images

The U.K has enjoyed firm economic growth in recent quarters and unemployment has fallen more than expected. The International Monetary Fund (IMF) said the U.K will be the fastest growing major economy in the developed world this year, with growth of 3.2 percent in 2014 – outstripping the rest of the G7 including the United States, Germany and France.

Read MoreWage conundrum weighs as BoE meets

But this economic recovery has not translated into better wages - something the BoE is waiting for before it raises rates. In its August inflation report, the Bank of England warned that pay growth remained weak in early 2014, falling to around 1 percent in the second quarter from 0.5 percent in the first three months of the year.

The bank has insisted that a rate hike is contingent on recovery in wage growth—which it does not expect in real terms until the middle of 2015.

As such, economists and strategists forecast the central bank will not raise the benchmark interest rate until early next year, although Bank of England Governor Mark Carney has hinted that a hike is "nearing".

Read MoreUK economy to grow at fastest rate since 2007

Growth to slow?

Despite expanding by 0.9 percent in the second quarter, there are concerns that Britain's economic growth could slow in the near future. The IMF expects gross domestic product (GDP) to slip to 2.7 percent next year, while data from the British Chambers of Commerce (BCC) on Thursday indicated that the economy slowed in the third quarter of this year.

"U.K. growth cannot rely permanently on consumer spending, and on unsustainable current account and budget deficits," said David Kern, chief economist at the BCC. "Unless exports and investment play a bigger role in growth, the recovery will stall."