Migrants hold down inflation says governor

Migrants hold down inflation says governor

Mervyn King, governor of the Bank of England, weighed into the debate about immigration last night when he strongly hinted that the influx of workers from eastern Europe over the past year had helped to limit increases in interest rates.

Speaking in Yorkshire, Mr King said that the 120,000 eastern Europeans who had arrived in Britain since 10 more countries joined the European Union in May 2004 had kept the lid on wages and prevented inflation from rising.

The governor said the appearance of new workers had helped to ease skill shortages in the economy at a time when inflation was just under Gordon Brown's 2% target.

"Without this influx to fill the skill gaps in a tight labour market it is likely that earnings would have risen at a faster rate, putting upward pressure on the costs of employers and, ultimately, inflation," he said.

Home Office estimates of immigration between May 2004 and March 2005 showed an increase in workers from eastern Europe "not far short of the average annual increase in the labour force over the past decade".

Interest rates were raised five times between November 2004 and August 2004 to reach 4.75%, but despite claimant-count unemployment being at its lowest level for 30 years, there has been little evidence of an acceleration in pay pressure.

"Private-sector regular pay growth has been subdued, which is somewhat puzzling in the context of 30-year-high employment rates, and 30-year-low unemployment.....continued below

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rates, which we would usually associate with a tight labour market," Mr King said.

"It is possible, indeed likely, that inflows of migrant labour have eased labour market pressure."

The governor added, however, that the impact of migrant labour on inflation would diminish if the inflows of the past year were a one-off adjustment to the new work opportunities in Britain.

Taking stock of the current state of the economy, Mr King said some of the beneficial impacts of globalisation on inflation - lower prices, higher real incomes and diminished pressure in the labour market - were starting to unwind.

There was a risk, Mr King said, that the recent sharp slowdown in spending on consumer goods would spread to services. He stressed, however, that there was also the possibility that inflationary pressure could build, with growth in the money supply strong, upside risks to labour costs, and rising import prices.

May's figures for producer prices showed the cost of the fuel and raw materials used by manufacturers still growing strongly but the increases being largely absorbed in lower profit margins.

According to the Office for National Statistics, input prices increased by 7.8% last month compared with a year ago and increased by 0.2% compared with April.

In contrast, the weakness of demand and the strength of competitive pressures meant the price of goods leaving factory prices fell by 0.2% last month, significantly below City expectations and the annual growth rate fell back to 2.7% compared with 3.3% in April - the lowest rate in three months.

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