- MPC member says tighter policy requires stronger growth, pay
- Says in speech trends such as demographics may need low rates
Bank of England policy maker Gertjan Vlieghe said he’s “patient” on interest rates and wants to see evidence of stronger price pressures before tightening policy.
“Inflation pressures remain muted across a wide range of indicators,” he said in a speech in London late on Monday. “In order to be confident enough of the medium-term inflation outlook to raise bank rate, I would like to see evidence that growth is not slowing further, and that a broad range of indicators related to inflation are generally on an upward trajectory.”
In a lecture that also analyzed the impact on the economy of long-term trends in debt, demographics and income distribution, Vlieghe said these could mean that borrowing costs are “substantially” lower than in the pre-crisis era for decades to come. These medium-term factors make him “more patient” on tightening policy, he said. At the same time, “on balance of probabilities, I do think the next move in rates is up.”
Vlieghe joined the nine-member MPC in September and was among the eight officials who voted to keep borrowing costs at 0.5 percent this month, with only Ian McCafferty calling for a quarter-point increase. Concern about the Chinese economy, weaker pay growth and a slump in oil prices have prompted investors to push back bets to 2017 on the timing of the first rise in borrowing costs in more than eight years.
At the heart of the debate among BOE officials is the labor market and pay, with wage growth now the least since February even though the unemployment rate is the lowest since 2008. That’s helping to keep a lid on inflation, which hovered around zero for all of last year. Official data on Tuesday may show the rate was 0.2 percent in December, well below the bank’s 2 percent target.
Vlieghe said Britain’s economic recovery hasn’t been strong enough to push up price growth.
“I do not see convincing evidence yet of upward momentum in pay pressures,” he said. “With growth still slowing, and inflation pressures either easing outright or disappointing relative to forecasts, I do not believe the conditions are in place to warrant a rise in bank rate.”
While inflation will eventually accelerate when the recovery is sustained and strong enough, factors complicating the outlook are longer-term changes in debt, demographics and income distribution, Vlieghe said, delivering his first public speech since he joined the MPC. Advanced economies still have further to run in reducing their debt overhang, while an aging population suggests an increase in savings. That, along with higher inequality, may mean that a given level of growth needs lower rates, he said.
Another concern is low inflation expectations, which are easing in some business surveys and compounding concerns stemming from household surveys running below longer-term averages. With the benchmark rate so close to zero, this raises the issue of low inflation becoming entrenched, he said.
“I think it is plausible that the appropriate real interest rate for the economy might be very low for years to come,” he said. “So policy rates, when they rise, may not need to rise by much over the coming years. These medium-term considerations make me relatively more patient before raising rates.”