BoE Forbes: UK to Hike Rates When Wages Pick Up

The Bank of England (BoE) should begin rising interest rates as soon as wages and unit labor costs begin to increase more, the text of the speech due to be delivered on Tuesday by BoE policymaker and rate-setter Kristin Forbes showed today.

London – The beginning of the tightening cycle in the UK should come once the wage growth and the unit labor costs begin to increase to such a level that their strength is enough to offset cheap oil, and is consistent with the CPI inflation returning to the 2% target in medium term, Forbes will argue on Tuesday.

“Once this upward momentum in wages and unit costs builds, as I expect it will, then it will be time for the UK to follow the example of its fellow ‘city’ and begin the slow and gradual process of tightening monetary policy. The relatively smooth experience of ‘lift-off’ in the US suggests that, at least in this ‘Tale of Two Cities’, there will not be a revolution,” Kristin Forbes will say during her speech to the Henry Jackson Society in Parliament on Tuesday.

Forbes said that even though the labor market has been tightening sharply in recent years, wages continue to run below their pre-crisis average.

“The UK labor market still has some slack and firms are not under so much pressure to find and keep workers that they need to pay more. With slow wage growth, inflation currently at 0.2%, and downward price pressure from cheaper energy and sterling’s past appreciation, there appears to be little risk of inflation suddenly spiking to well above our 2% target in a way that would require increasing interest rates soon,” Forbes will say.

She said that even though there are striking similarities between the US and the UK economies, such as a sharply tightening labor market, ultra-loose monetary policy, rapid jobs creation, and weak headline wage growth, there are “four major differences between the UK and US labor markets: in participation, self-employment, migration, and the continuity in the labor market recovery”.

Forbes’ much less dovish, but cautious, comments follow those of her colleague in the nine-strong Monetary Policy Committee Martin Weale, who said in a similar tone last week that domestically generated price pressures in the form of unit wage costs are expected to increase in the medium-term and exert upward pressure on consumer price inflation in the UK.

Weale admitted that some of the downward pressures on CPI inflation may persist, but at the same time he said it would not be wise to put off the tightening cycle for too long: “If you leave it where it is until you’re absolutely sure that it needs to change, you can be sure that you’ve waited for too long.”

The BoE Monetary Policy Committee (MPC) said in January that a weaker-than-expected output per worker would partly offset the impact of lower pay growth, but still leave them: “A little below the level anticipated at the time of the November Inflation Report”. The MPC concluded: “while domestic cost growth over the past year had been below that necessary for inflation to return sustainably to the 2% target, it remained likely to increase over time.”

Forbes and Weale’s speeches seem to contrast partly with the one given by Governor Mark Carney last week, when he sounded more cautious on the policy path in the UK.

 

Original Article: W B P Online