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Despite modest UK growth upgrade, Bank of England cautions over subdued wage growth

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LONDON - The Bank of England modestly upgraded its growth forecast for the U.K. on Wednesday but signalled its concerns over the failure of wages, which are actually falling for the first time since 2009, to keep track with the projected expansion.

In its quarterly economic projections, the bank raised its 2014 growth forecast to 3.5 per cent from 3.4 per cent and Governor Mark Carney said the momentum is looking more assured, with unemployment expected to drop below 6 per cent by the end of the year. Figures earlier showed the unemployment down at 6.4 per cent in the April to June period, its lowest rate in nearly 6 years.

However, the bank halved its forecast for wage growth in 2014 to a below-inflation 1.25 per cent.

"This expansion faces some challenges," Carney said, noting that geopolitical risks have intensified and that financial conditions were likely to become tighter as the global recovery progresses.

"Sustained expansion here at home will ultimately require growth in productivity and real incomes, both of which have disappointed," he said.

Figures from the Office of National Statistics showed that pay including bonuses in the April to June period was 0.2 per cent lower than a year earlier, due to an unusually high growth rate a year ago. Whatever the reason, that was the first time wages have fallen since May, 2009 when Britain was, like much of the world, mired in a deep recession following the global financial crisis.

If bonuses were excluded, the growth rate measured at 0.6 per cent higher than a year earlier.

Carney acknowledged that the weakness in wages means that the measure of "slack" in the economy had been greater than previously thought. As a result, he said that the economy, Europe's third-largest, may be able to sustain a higher level of employment without generating additional inflationary pressures.

"Increases in Bank Rate, when they come, are likely to be gradual and limited," he said. "While that is an expectation not a promise, its clarity is helping businesses to plan, invest and hire, supporting the economic momentum we see today and will need tomorrow."

With wages lagging inflation, Chris Williamson, an economist at Markit, says policymakers will be reluctant to raise interest rates for fear of stalling the recovery. Williamson said the bank wants to ensure pay is rising so that households can afford higher borrowing costs.

"Such weak pay growth adds to the sense that any first rate rise will be delayed until early next year," he said.

That's certainly the immediate view in the markets, where the pound has fallen 0.6 per cent to $1.6703.

The central bank has kept its main interest rate at a record low of 0.5 per cent since 2009 to help nurse the economy back to health. A run of upbeat economic data, including the U.K.'s high growth rate, has raised market expectations that borrowing rates will start to rise sometime over the coming year. Figures last month showed GDP had finally surpassed its pre-recession peak.

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