The Bank of England will need to see a “clearer decline” in wages before it can start cutting interest rates, deputy governor for Monetary Policy Ben Broadbent said today.
Speaking at the London Business School, Broadbent - one of nine Monetary Policy Committee (MPC) members who together set interest rates in the UK - discussed the official sources of data on the British economy.
He noted that “the MPC has had to pay more attention to wage growth and services inflation than in the past”, partly due to lower reliability of employment statistics. MPC members have repeatedly warned that wage growth is too high to allow inflation to get down to their 2% target, after it hit record highs over the summer, and that interest rates will have to stay high to slow wage growth down. The warnings around high wage growth have continued even as the headline measure of inflation has declined.
The national Labour Force Survey, the source of stats like the unemployment rate, has suffered from low response rates in recent months, leading the ONS to trial new “experimental” stats intended to better measure how many people are out of work.
He added that this meant the Bank can be slower to respond to the current economic situation, as changes are usually seen in rates of employment before they filter through to wages and inflation.
“There are clearly risks in moving only when you see ‘the whites of inflation’s eyes’,” Broadbent said. “But it may still be a price worth paying.”
The headline wage growth figures are based on a three-month average, covering a period roughly 2-5 months before the figures are released. This means they represent a snapshot of an economy that has long-since passed. More up-to-date “flash” figures are also published, but are often subject to significant revisions.
Broadbent said: “The official wage data are nonetheless subject to revision, thanks to late returns; even though it’s adjusted for outliers, average weekly earnings growth can be pretty volatile, particularly over short periods of time; and, for much of this year, the headline figure has been higher than many other indicators of wage growth.”
Earlier this month, the ONS reported that year-on-year wage growth had ticked slightly down to 7.2% in the three months to September. Yet “flash” figures showed a much more significant cooling in October, with wages declining on a month-on-month basis.
While October’s figures suggested interest rate hikes are slowing the labour market, Broadbent said the Bank wouldn’t start cutting rates until the picture was clearer.
He said: “It may be that we’re now seeing a degree of re-convergence – the official data have softened a bit in the last couple of months. But the slightly muddy picture of the recent past, coupled with the general volatility of the data, means the MPC would probably want to see more evidence, across several indicators, before concluding things are on a clear downward trend.
Broadbent continued: “Given the volatility in the official estimates, and the disparity (such as it is) among the various indicators we have, it will probably require a more protracted and clearer decline in these series before the MPC can safely conclude that things are on a firmly downward trend.”
