(Bloomberg) -- A steady pick-up in wage growth and cost pressures show the U.K. economy is ready for an increase in interest rates, according to Bank of England Chief Economist Andy Haldane.
Haldane, who shocked investors this month by voting for an interest-rate increase, said he’s seeing developments that will “add impetus to cost and inflationary pressures.”
Among them is the lifting of a pay cap for public workers that he said will have knock-on effects elsewhere because of the tightness in the labor market. Haldane also noted that workers remaining in their current jobs are starting to see a pickup in pay -- a “significant development” since wage pressures had been largely confined to those moving jobs.
All that was enough for him to join Ian McCafferty and Michael Saunders in voting to tighten policy in June. The majority of the nine-member Monetary Policy Committee thought it best to keep the key interest rate at 0.5 percent given questions over the economy after a soft first quarter.
Haldane said that the weakness held him back from voting to tighten in May, though his view is that the economy is turning around. The BOE’s next interest-rate decision is in August, with investors pricing in a 60 percent chance of a hike. Those odds were little changed after the speech, although the pound pared an earlier decline to trade at $1.3104.
“The underlying picture now appears to be one of gently rising household spending,” with measures of retail sales, consumer confidence and consumer credit bouncing back, he said.
Echoing the BOE’s broad analysis of the economy, he said the U.K. is growing around its 1.5 percent trend rate and there’s little to no slack left. A rate increase now would “lower the risk of needing to tighten policy less gradually in future and cause a sharper adjustment in the economy.”
Known for thinking outside the box, Haldane’s speech focused mainly on the U.K.’s productivity problem, which he called the nation’s greatest challenge, and ways it could be tackled. Using and sharing technology to track supply chains could help spread productivity-enhancing knowledge, he said, as could better knowledge sharing between universities and companies, as well as between different sectors and regions.
In an apparent retort to a Labour Party report suggesting the BOE’s remit should be overhauled to include a 3 percent target for productivity growth, Haldane said central bankers can only help in “diagnosing productivity problems and in identifying policies that could lift barriers to productivity improvement.”
“When it comes to those structural features of the economy, central banks do not have the tools to affect lasting change,” he added. “We do not build schools, colleges, houses, roads, railways or banks. Nor do we finance them. Those tools, rightly, are in the hands either of governments or private companies.”
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