Wage growth set to pick up as Brexit deters foreign workers

Bank of England policymaker Michael Saunders expects wage growth to accelerate this year as Brexit results in fewer foreign workers coming to Britain.

Mr Saunders, a member of the Bank's Monetary Policy Committee, also said that interest rates will likely rise further to rein in soaring inflation triggered by the collapse in the value of the pound.

In a speech in London, Mr Saunders said the pace of recent job creation has been driven largely by inflows of foreign workers, especially from other EU countries, while the aggregate contribution from people born in the UK has been "close to zero".

But Brexit has meant that the growth of the foreign-born workforce in the UK has "slowed sharply in recent quarters".

The number of EU workers coming to Britain has declined since the referendum amid concerns over their status, a declining UK economy and a dilapidated pound - all conspiring to lessen the attractiveness of Britain.

As the number of available workers falls, firms will have to up wages in a bid to fill roles and attract skilled employees.

"My hunch is that further tightening in the labour market is likely to cause underlying pay growth to pick up from about 2.25% recently to about 3% this year and probably a little higher next year," Mr Saunders said.

While wages could increase, Mr Saunders added, reduced workforce growth would see the economy struggle to keep growing at 1.5%.

"With reduced workforce growth, productivity growth would need to pick up substantially to keep potential economic growth at around 1.5% year on year.

"The drop in foreign worker inflows reduces demand in the economy as well as supply.

"For example, it is likely to already be hitting consumer spending, with an impact roughly proportionate to the drop in workforce growth.

"However, the adverse effects on overall GDP may not necessarily be as immediate."

Mr Saunders, a "hawk", also signalled his support for "limited and gradual" increases in rates, adding that it is likely that interest rates will "need to rise further over time".

He said: "If the economy turns out broadly in line with the outlook I have described - labour market tightness and signs of higher pay growth - I consider it likely that interest rates will need to rise further over time.

"As with other MPC members, I expect that any further tightening will be limited and gradual.

"But I am not going to pre-announce how I might vote at any particular future MPC meeting."

In November the Bank of England voted to increase rates for the first rise since July 2007 as it sought to cool surging inflation.

It signalled that two more rate hikes were likely over the next three years to return inflation back to its 2% target, which could see rates hit 1% by the end of 2020.