BOE’s Pill Offers Reason Why U.K. May Beat Fed to Raising Rates
Bank of England Chief Economist Huw Pill said the pace of wage inflation in the U.K. is likely to exceed that of both the U.S. and the eurozone.
The remark a day after the U.K. central bank unexpectedly left interest rates on hold helps explain why Britain may be the first major economy to tighten monetary policy since the start of the pandemic.
Answering criticism that they wrong-footed the market with no change, both Pill and Governor Andrew Bailey said they’re waiting for more data from the labor market before deciding on when to lift rates. Bailey said policy makers will not “bottle it” when the time for tightening comes.
Officials were in firefighting mode after markets reacted with dismay to the BOE’s decision on Thursday to hold rates at a record low 0.1% despite warnings that inflation is likely to surpass more than double the 2% target. Traders had been forecasting an increase to 0.25%, which is now expected at the next meeting on Dec. 16.
Briefing business leaders on Friday, Pill drew on international comparisons to explain why a rate rise in the U.K. may be imminent.
“Measures of underlying wage growth in the U.S. and the euro area remain at or below pre-pandemic levels,” the chief economist said. “In the U.K., that is now beginning to exceed and is still on an upward trend relative to pre-Covid levels.”
Pill said the jobs market was tightening, and that would tend to increase pressures for wage rises. The BOE wants to prevent rising pay from fanning an inflationary spiral that pushes up prices across the economy. Pill said the BOE is looking both at the headline wage figures and what specific sectors of the economy are doing to with pay. He described most elements of inflation as “temporary.”
The labor market element was the most important factor in Thursday’s decision for no change, Bailey said in an interview on BBC radio earlier Friday. He noted that two official reports detailing unemployment, wages and job vacancies will be released before the BOE’s next meeting.
Policy makers need those figures to assess whether the labor market is absorbing some 1 million people who remained on furlough when the government closed the program in September and how shortages of workers are affecting pay raises.
“If you ask the question why haven’t we done it now, the answer is all to do really with the labor market in my view,” Bailey told BBC radio.
Dave Ramsden, a deputy governor who vote in the minority for a rate increase, said at the briefing with Pill that he had “seen enough evidence” of “inflation feeding into wages and pushing up on inflation on a more persistent basis.”
Pill added, “I would not distance myself from what Dave said, and I think that does show that this was an on-a-knife-edge decision.”
A fourth policy maker, speaking at a separate event hosted by the International Monetary Fund, pointed out the risks of moving too early.
“If you react immediately to inflation without waiting on what’s going on in the real economy, the risk is that you choke off the recovery and delay the renormalization of the economy,” said Silvana Tenreyro, an external member of the BOE’s nine-person policy panel.
“We are on a trajectory of growth,” Tenreyro said. “We’re still below where we were in 2019. Given those significant uncertainties, particularly on how quickly labor market recoveries will process ... central banks will need to balance their inflation and real economy objectives.”
One sign that rates will rise at the December meeting was the language the BOE used in the minutes to detail this week’s vote. Echoing words used in September 2017 to prepare markets for a rate increase at the next meeting, the minutes said, “It will be necessary over coming months to increase Bank Rate to return inflation sustainably to the 2% target.”
Dan Hanson, senior U.K. economist at Bloomberg Economics, said, “The guidance has echoes of the last time the committee as whole sent a clear message rates were about to rise. We’d argue the latest form of words sends a stronger signal.”
In 2017, only “a majority” of members on the committee supported the statement and they said tightening was “likely to be appropriate.” This time, the whole committee signed the statement and said a move was “necessary.”
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