A deputy governor at the Bank of England has defended his decision to vote against this month’s interest rate hike, saying it would be better to wait for signs of rising wage growth before pulling the trigger.
Sir Jon Cunliffe, the Bank’s deputy governor for financial stability and a member of the rate-setting Monetary Policy Committee (MPC), suggested that the Bank may be blindly relying on economic models which predict that wages will rise in response to lower unemployment, leaving it at risk of overestimating domestic inflationary pressure.
“Given the uncertainties … and the serial disappointments we have had in recent years in forecasting the impact of unemployment on pay growth, there is, in my view, a not immaterial risk that the trade-off is not as it currently appears and that domestic inflation pressure will undershoot the committee’s collective expectation,” Sir Jon said in a speech to the Oxford Economics Society.
He said that the lack of evidence around home-grown pressures on prices should allow the Bank to wait longer before raising interest rates.
“In my view, the low level of domestic pressure on inflation now, the absence of second round effects from the depreciation of sterling, and inflation expectations around their historical averages make it possible to wait before tightening policy until there is clear evidence that pay growth is responding to the level of unemployment in line with our forecast,” he said.
Official figures released on Tuesday showed that the Consumer Prices Index (CPI) measure of inflation held steady at 3% in October, unchanged from a five-year high in September and 1% above the Bank of England’s 2% target.
But the spike in inflation has been primarily linked to the effects of the Brexit-hit pound, which has made imported products more expensive and impacted prices at home.
Sir Jon was one of two MPC members who voted to keep rates at record lows of 0.25% earlier this month, alongside Sir Dave Ramsden – amid fears over muted wage growth and doubts over the Bank’s forecast for domestic inflation pressures to pick up.
However, they were outnumbered by the remaining seven members of the MPC, resulting in a reversal of an interest rate cut that followed the Brexit vote and marking the Bank’s first hike in a decade.
Sir Jon explained that while the Bank does not have a mandate to monitor or adjust for employment levels or wage growth, they provided additional evidence and could better inform MPC decisions on interest rates.
“While neither unemployment nor pay is part of our target, the relationship between them is important to our understanding of domestically generated inflationary pressure in the economy and how it is likely to evolve over the two to three-year period over which monetary policy can have influence,” Sir Jon said.
“And arguably, since the crisis, that relationship has become more important to our understanding of inflationary pressure in the economy.”