The recent UK interest rate hike will result in increased pressure on Britainís employers to provide greater salary increase budgets, management consultancy Hay Group warns today.
The recent decision by the Monetary Policy Committee (MPC) to raise interest rates to 5.25% was driven mainly by rising inflation, with the Consumer Price Index (CPI) rising to 2.7% in November 2006 and now hitting the crucial 3.0% mark.
Higher inflation, combined with increased interest rates, represents an erosion of real wages ñ i.e. the buying power of workersí pay packets ñ due to rising prices and greater mortgage and loan repayments. Sharp increases in energy and public transport costs in recent months have also added to the pressure on real earnings.
This will present a headache for employers in the form of pressure from employees over pay increases ñ especially those planned for the first half of 2007. These are likely to have been planned up to a year beforehand, taking into account last yearís historical inflation and interest rate levels.
As a result, a standard wage increase - of for example 3.5% - will effectively represent less in real terms than before inflation and interest rates climbed.
ìRising household expenditure and debt repayments mean reduced cash available for other expenditure,î said Rob McPherson, consultant at Hay Group. ìThis can only act to raise employeesí expectations at salary review time.î
This pressure comes at a time when salary increases have been on the up for the last two years or more. October 2006 Hay Group PayNet data shows that the overall UK payroll bill was rising by 3.7% per year.
Pay growth for the period of October 04/05 was 3.3% - an overall increase of 0.4%, which if maintained in 2007 would see salary increases top 4% for the first time in over 7 years. This figure may rise even further due to pressure from employees in response to inflation and interest hikes.
ìThereís no doubt that we are in a period of upward pressure on wages ñ which can only be exacerbated by the latest interest rate hike and surrounding economic conditions,î said Rob McPherson, consultant, Hay Group.
ìA key influence on future salary increases will not only be how the MPC manages UK inflation, but also how companies react to the demands of their employees in the face of increasing costs.î
Peter Christie, Director of Reward at Hay Group added: ìThis adds to the challenges facing companies when it comes to managing costs. As well as placing upward pressure on salaries, which in turn affect social security and benefits costs, companies are also coming under pressure from higher fuel and raw material costs.î
Interest Rate Rise Signals Upward Pressure on Wages
Pay Packets Squeezed By Rising Costs
