Economists warn that raising the minimum wage could lead to sustained inflation levels.

Economists have warned that the almost 10 percent increase in the minimum wage could delay the Bank of England (BoE) from lowering interest rates and slowing the expected decline in inflation.

“The concern is that this year’s increase could lead to higher wage growth and inflation,” said economist Ashley Webb from consultancy firm Capital Economics on Monday.

The BoE’s Monetary Policy Committee (MPC) stated that it wants to see wage growth cooling before considering a reduction in the current interest rate of 5.25 percent.

“After facing criticism for not acting quickly to tighten policy when inflation was rising, the MPC might choose to proceed cautiously in decreasing rates,” said Chief Economic Adviser Martin Beck from the EY Item Club, an economic forecasting group.

“The significant rise in the national living wage in April presents another reason for the MPC to hold off on any immediate action,” Mr. Beck added.

Not a Key Factor

However, economists at Morgan Stanley believe that the minimum wage increase is not a critical factor since it affects only around 4.9 percent of the workforce.

Furthermore, the wage rise, combined with reductions in national insurance and slower inflation, may benefit retailers, according to PwC.

In November, Chancellor of the Exchequer Jeremy Hunt announced that the living wage for those aged 21 and over would increase by 9.8 percent to £11.44 per hour from April 1, impacting nearly 3 million workers in the UK. The minimum wage for individuals aged 18-20 also increased from £7.49 to £8.60, while those under 18 and apprentices saw their hourly rate go up from £5.28 to £6.40.

Inflation Decline to 3.4 Percent

When Rishi Sunak became prime minister in October 2022, inflation had peaked at 11.1 percent and has since reduced, reaching 3.4 percent by March.

Despite still being above the BoE’s target of 2 percent, Mr. Hunt expressed confidence that it would reach the target within a few months.

“Families today can be relieved that we are well on track to bringing inflation down to 2 percent,” Mr. Hunt stated, calling it the lowest rate in over two years.

The primary driver of this decline was food prices, with Mr. Hunt noting that the easing of food inflation was a positive sign for the economy.

“This sets the stage for improved economic conditions, allowing further progress towards our goal of enhancing growth and making work more lucrative by reducing national insurance contributions as we aim to eliminate the double tax on work,” Mr. Hunt mentioned.

In his final budget before the general election, Mr. Hunt confirmed a 2 pence reduction in national insurance contributions, resulting in an annual savings of £450 for the average person.

Stable Inflation at 5.25 Percent

However, on March 22, the BoE decided to maintain interest rates at 5.25 percent.

While acknowledging positive signs of decreasing inflation, BoE Governor Andrew Bailey stated that rates would remain unchanged until there was confidence that inflation would return to the 2 percent target and remain stable.

Mr. Bailey emphasized the positive trend in inflation reduction and expressed optimism for the future, although interest rates are not yet ready to be lowered.

The BoE uses interest rates as a tool to manage inflation by curbing spending in the economy, leading to a reduction in price rises and subsequently lower inflation levels.

PA Media contributed to this report.