The Bank of England deputy governor, Minouche Shafik, has said she will not vote for an interest rate rise until she is convinced wage growth has recovered.
In the latest sign from policymakers that borrowing costs will remain on hold well into 2016, Shafik noted signs that the rate of earnings growth in the UK had “levelled off” recently and that other factors were also keeping inflation low, such as the strong pound and a drop in commodity prices.
Her comments echoed the minutes of last week’s monetary policy meeting when the Bank left interest rates at 0.5%, citing another fall in oil prices and that pay growth had “flattened off”. Rates have been at a record low since the depths of the financial crisis in 2009.
Shafik said in a speech to the Institute of Directors: “The most likely outcome is that wage growth will soon resume its recovery, but there are alternative states of the world in which it takes longer for that to happen. So I judge it prudent to tread carefully, and refrain from voting for an increase in bank rate until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target.”
The comments come as financial markets prepare for the Bank’s US counterpart, the Federal Reserve, to raise interest rates for the first time in almost a decade. Bank of England policymakers have repeatedly sought to play down market expectations that they will take cues from the Fed in setting UK policy.
Shafik, who is the Bank’s deputy governor for markets and banking, said that once UK interest rates do start to rise, she sees them doing so slightly faster than markets had been implying.
When the Bank published its latest forecasts for the economy in November financial markets were implying the first increase in the base rate would come in March 2017, and that it would reach 1.25% by the end of 2018.
Financial markets are now pricing in a UK rate hike around the end of next year, while economists polled by Reuters mostly expect it to happen by mid-2016.
“Should the downside risks from the world economy fail to materialise, and absent further shocks, once wage growth has returned to a level consistent with inflation returning to target I would expect the economy to warrant a path for bank rate that increases more quickly than implied by the market yield curve used to condition the November Inflation Report,” Shafik said. .
“I think it is interesting to note that surveys of economic forecasters – a more direct measure of the expected future path of interest rates – show expectations for a faster pace of increases in Bank Rate. Having said that, I think all agents, and all members of the MPC, expect the future path to be gradual and limited.”
Shafik was among the eight members of the nine-strong committee voting for no change at last week’s meeting. Just one member, Ian McCafferty, voted for a rate rise to 0.75% given concerns while inflation is negative now it could soon rise and overshoot the Bank’s target.
Shafik saw several possible explanations for wage growth easing off: that the number of hours worked per person per week may have started to decline; that employment growth has been skewed towards lower paid jobs; and that the low level of headline inflation may be leading to less generous pay rises.
Overall she was upbeat that the UK was putting the financial crisis behind it.
“There are many signs that the economy is normalising - the labour market is tightening, consumption growth is solid, investment is recovering, and even productivity growth is showing tentative signs of a return,” Shafik said.
“And although the downward pressure on inflation from movements in energy prices and the exchange rate are proving persistent, they will not have a permanent effect on inflation.”
Her view that the Bank should tread very carefully when deciding when to start raising interest rates follows similar comments from the International Monetary Fund last week. In its latest healthcheck of the UK economy, the IMF said borrowing costs should stay on hold until there were clearer signs of inflationary pressures.
This article was written by Katie Allen, for theguardian.com on Monday 14th December 2015 12.00 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010