BOE’s Shafik Says Productivity to Guide Rate Path, Post Reports

Bank of England Deputy Governor Nemat Shafik said officials may have to “move more quickly” on rate increases if salary gains aren’t matched by growth in productivity, according to a newspaper interview.

The puzzle of weak wages amid strong growth in payrolls is at the center of policy makers’ debate on when to lift borrowing costs from a record low. In an interview with the Yorkshire Post published today, Shafik said that while the recovery is “encouraging,” the rate of pay growth is a key factor because officials don’t want to take any risks.

“If those wage increases are not accompanied by productivity increases then I think we will have to move more quickly on rates because inflationary pressures will build up,” Shafik said, according to an article published on the newspaper’s website. “If wage increases are expected but productivity is performing well we can wait for longer.”

Shafik has attended two policy meetings since joining the BOE, and voted to keep the benchmark rate at 0.5 percent both times. Her emphasis on the link between productivity and wages underscores Governor Mark Carney’s move to focus on pay as the economy gains traction. Officials have said the labor-market puzzle means increases in the key rate will probably be gradual.

“The recovery is encouraging,” Shafik told the Yorkshire Post. Higher levels of productivity, higher levels of efficiency, and companies being able to pay higher wages are “going to be key for making this recovery really lasting and sustainable,” she said.

Rate Debate

Others on the Monetary Policy Committee have argued that rates should be increased now on the prospect of wages increasing. Martin Weale and Ian McCafferty voted for a 25 basis point lift in the key rate this month, saying an increase now would enable officials to pursue their guidance that the path will be “gradual and limited.” The majority cited a muted inflation outlook and headwinds from a weak euro-region economy as backing the case for keeping the key rate unchanged.

The biggest risk to the U.K. economy is from Europe, Britain’s biggest trading partner, Shafik said in the interview.

The European Central Bank, which announced new stimulus this month, can’t do “all the heavy lifting,” and governments need to implement “more growth-oriented fiscal policies and structural reforms” to make bigger economies, such as France and Italy, more competitive, Shafik said.

The unwinding of the BOE’s asset-purchase program, used to stimulate the U.K. economy, is still “a way away” and will depend on the level of the key interest rate, Shafik said.

The BOE’s benchmark must have risen to a point “where if we needed to change gear and loosen policy we could materially reduce them from that level,” she told the paper.

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