The Bank of England needs to see a steeper and prolonged easing of pay growth before concluding its battle against wage inflation has been won, one of its deputy governors has warned.
In the latest sign that Threadneedle Street has no immediate plans to cut interest rates, Ben Broadbent said that in the current uncertain environment it was too early to say the labour market was cooling.
Financial markets are assuming the Bank will cut interest rates five times next year in light of the recent fall in the annual inflation rate to 4.6% and the drop from 8% to 7.2% in the official measure of annual earnings growth.
However, Broadbent said the Bank’s nine-strong monetary policy committee (MPC) would take more convincing that wage pressure was truly abating.
“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.”
Broadbent was one of six MPC members who last week voted to keep official borrowing costs unchanged at 5.25%, while the other three supported an increase to 5.5%. The decision – coupled with the message from the Bank’s governor, Andrew Bailey, that it was too early to think about lower rates, was intended to counter City speculation about a policy boost to help the flatlining economy.
The Bank deputy governor said there was inevitably a degree of inaccuracy in economic measurement.
“Currently, if only for a short period of time, there’s a little more uncertainty than usual about the behaviour of unemployment. Official estimates of wage growth have been volatile and other indicators have exhibited slightly lower (if still very elevated) rates of growth through much of this year.”
Broadbent cited the UK’s experience in the late 1980s as a previous example of uncertainty proving costly.
“Early estimates of GDP growth during the late-1980s boom significantly underestimated the strength of the economy. This may have affected the setting of monetary policy and contributed to the scale of the subsequent inflation,” he said.
There was some doubt, Broadbent added, about whether the rapid pickup in wage growth in the spring and summer of 2023 had been quite as marked as in the official data, which had been volatile. Other measures had not been quite as strong.
“By the same token, of course, the noisiness of these measures, and the discrepancies between them must also inject a degree of caution about the more recent decline. One would want to see further evidence, across several indicators, before concluding things are on a clear downward trend,” Broadbent said.
