Sticky Pay Rises Slow BoE Rate Cuts
This year's newly appointed Deputy Governor of the Bank of England, Clare Lombardelli, stated that the central bank's policymakers should cautiously proceed with the path of interest rate cuts, as the bank still harbors concerns over wage growth, particularly the sticky pace of wage increases and the inflation rate not falling as rapidly as the market anticipates.
Earlier this year, Lombardelli joined the Bank of England and in her latest inaugural speech, she expressed that the UK has made "good progress in curbing the inflation rate," but "the persistent factors of inflation and the related uncertainties of how the labor market will evolve are worrying."
"I believe the possibility of inflation moving down and up is roughly balanced. But for now, I am more concerned that if inflation were to rise again, it could bring about some unexpected consequences, as this might require more costly monetary policy responses," she said.
It is understood that Lombardelli, like most policymakers, voted in favor of reducing the benchmark interest rate by 25 basis points to 4.75% at this month's Bank of England monetary policy meeting. She made the aforementioned remarks at the Bank of England Observer's Annual Conference held in London. Additionally, she supports the consensus of the Bank of England's Monetary Policy Committee (MPC) that restrictive monetary policy should be "gradually" unwound.
Advertisement
The theme of her speech was the Bank of England's response to Bernanke's assessment of the Bank of England's forecasting record, which was released in April this year. Former Federal Reserve Chairman Ben Bernanke stated that a thorough reform of models and data arrangements is needed, along with new ways to convey the Bank of England's forecasts and expected management information.
Lombardelli, who leads the Bank of England's response to Bernanke's key comments, said, "This plan will take time to implement—it will take years, not months." She added, "I believe that if we rush, it would be a real mistake."
Regarding the Bank of England's monetary policy, Lombardelli stated that the current interest rate level is "within the restrictive range," and she supports "gradually unwinding monetary policy restrictions," but data in the coming months will be crucial and need to be "carefully observed." Interest rate futures markets predict that by the end of next year, the Bank of England will reduce interest rates to 4%.
She added that the UK's wage growth path remains a particularly worrying issue, and the policies of the new Labor government have increased uncertainties. "There are signs that the wage disinflation process may be slowing down, so it is premature to declare that the inflation problem has been resolved. It is often said that the last mile may be the most difficult, and this is the stage we are at now."
She added that the government's plan to raise the minimum wage, increased taxes on the job market, and changes to workers' rights have brought "great uncertainty" to the labor market and wage development.
Employment costs
Last month, the UK government announced in the budget that the national insurance contributions paid by employers would increase by about £26 billion (approximately $32.7 billion). Employers threatened to raise prices to offset this additional cost. In addition, the minimum wage will be increased by 6.7% next April, which may push up wage settlements. Surveys by the Bank of England show that businesses are concerned about the impact of the minimum wage increase.
She said that issues with the official labor force survey complicate the situation, making it difficult to judge how tight the labor market is.
Lombardelli also warned the market not to overinterpret last week's weak business activity data. The data seems to indicate that the UK economy may be entering a recession, which may require a faster pace of interest rate cuts. "I would not take a strong signal from a single data point," Lombardelli said when discussing the UK's unexpectedly weak PMI preview value.
Former Federal Reserve Chairman Bernanke has suggested that the Bank of England should abandon the use of fan charts and instead adopt scenario analysis to more clearly convey the Bank of England's responses to different events. Fan charts provide the likelihood of different outcomes for the economy and inflation. Since then, the Bank of England has been committed to using scenario analysis.
He also urged the Bank of England to consider incorporating its interest rate trajectory forecasts, rather than blindly following the market curve, a practice that has complicated market communication mechanisms in the past.
Lombardelli said that the assessment report "has parts that are very uncomfortable to read," and she is open to using the Bank of England's forecasts to calculate interest rates under new scenarios. "We will consider whether to publish forecasts with a policy-endogenous path model to replace or supplement forecasts based on market interest rate paths," she said.
It is understood that some economists have urged the Bank of England to follow the Federal Reserve's "dot plot," which is an anonymous description of the evolution of the interest rate path by each Federal Reserve policymaker. Lombardelli said the Bank of England would not follow suit, stating that this market communication method is "not as simple as it sounds."