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The Governor of the Bank of England warned that UK inflation will be higher if eastern European workers stop coming to the UK. There is a fear that the large flow of immigrants in the past year was a one-off situation, resulting from EU enlargement in May 2004.
In a speech to business leaders, Mervyn King said immigrant workers appeared to have helped the British economy by restraining wage growth at a time when unemployment is at a 30-year low.
Although estimates vary, it is believed that around 120,000 workers entered the UK from the 10 countries that joined the European Union after May last year.
"Without this influx to fill the skills gaps in a tight labour market it is likely that earnings would have risen at a faster rate," King said.
Bigger salaries for British workers would have increased costs for employers who would have been pressured into raising their prices to protect profits, he said. This would have increased the risk of inflation overshooting the Bank's target of 2% in two years' time.
King said the impact of globalisation on wage costs - along with consumer spending and high street prices - was central to how the Bank decides interest rates. The possibility that eastern European workers may no longer come to the UK in such large numbers poses a threat to inflation, he said.
"There is a risk that the effect of migrant labour on wage costs may diminish if the inflows over the past year represented a one-off adjustment to the new opportunities to work in Britain," Mr King said.
