BOE’s Forbes Sees Wage Risk as Pound Price Pressure EasesJennifer Ryan
Bank of England policy maker Kristin Forbes said the pound’s downward pressure on U.K. inflation may start fading and there’s a risk of a pickup in wage growth.
Forbes, a former White House adviser, made the comments in her first speech since joining the BOE in July. While she has voted to keep the key interest rate at a record-low 0.5 percent, her remarks chime with the view of the minority on the nine-member Monetary Policy Committee, who are pushing to tighten policy to ensure inflation remains under control.
With the U.K. poised for the fastest growth in the Group of Seven this year, the debate on when to lift interest rates is intensifying. The pound’s 7 percent appreciation in the past year has helped keep consumer-price growth below the BOE’s 2 percent target, adding weight to the case for maintaining emergency stimulus for now.
“Sterling’s past moves have reduced the risk of inflation increasing sharply, despite the strong growth in employment and the overall economy,” Forbes, 44, said in London yesterday. The effect on price growth “will peak at the end of 2014 and then begin to fade.”
Two of the central bank’s MPC have voted to increase the key rate to 0.75 percent for the past two months. With the panel due to hold its next monthly meeting on Oct. 7-8, Forbes said it must be mindful of the potential risks to the target.
“The effects of sterling’s appreciation in 2013 through early 2014 will also not fade away as quickly as a midsummer night’s dream,” she said after citing William Shakespeare’s play in her opening remarks. “But as these calming effects on inflation gradually dissipate, it will become even more important to monitor prospective signs of domestic price pressures to avoid the troublesome inflation sprite.”
While Forbes is among the seven-strong majority, including Governor Mark Carney, arguing that muted inflation is a key reason to maintain record-low rates, she said that price pressures would be stronger if officials ignored the currency effect. Wage growth is at the heart of the split, with the two dissenters saying the central bank needs to act sooner.
Some surveys on wages and inflation expectations indicate pay increases will continue without causing a breach of the BOE’s goal, while others “suggest wage pressures may be increasing more rapidly,” she said. “Taken all together, these surveys could be indicating that the low levels of domestically-generated inflation, especially in wages, are unlikely to persist for much longer.”
Ben Broadbent, BOE deputy governor for monetary policy, said in an interview with ITV he saw “some signs” that an “unprecedented squeeze on living standards” was ending. Still, the U.K. is “not ready yet” for a rate increase and “there are lots of other things that might affect inflation and I think it would be a mistake therefore to tie our decision to only one thing.”
Broadbent was in the majority last month voting for no change to rates.
The improving economy has helped propel sterling higher, with traders betting on the prospect for higher borrowing costs. The pound is the best performer over the past year in a basket of 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. It appreciated more than 14 percent between March 2013 and July 2014.
The strength has pushed down inflation today by about 0.8 percentage points, Forbes said, citing economic models. The effect will get larger toward the end of the year and depress inflation by as much as 1 percentage point, she said.
“Although this dampening effect fades over time, the simulations suggest that the drag could persist for several more quarters,” Forbes said. “The key implication is that sterling’s appreciation that began early last year is still dampening inflation today.”
Consumer-price growth was at 1.5 percent in August, an eighth month below the BOE target.
The pound rose 0.1 percent today and traded at $1.62 at 8:36 a.m. in London. It reached this year’s high of $1.7192 in July, and fell to a low of $1.6052 last month on speculation Scotland might choose to leave the U.K. Forbes said that while the Scottish referendum on Sept. 18 had created “some volatility,” the economic impact would probably be minimal.
The pickup in the currency, when spread over several quarters, may have reduced total hours worked and gross domestic product growth by as much as 0.4 percent each by the end of the second quarter. The economy grew 0.9 percent in the three months to June, its sixth consecutive period of expansion.
While employment and demand “would have been moderately higher” without the gain in sterling, “these effects are small in relation to the recovery” in areas that have supported jobs and the economy, she said.
Forbes joined the BOE from the Massachusetts Institute of Technology, beating 33 applicants. She was previously the youngest-ever member on the White House Council of Economic Advisers, having also worked on global financial stability issues, including the Argentine debt crisis in 2001, with then-U.S. Treasury Undersecretary John Taylor.
She won tenure at MIT after pushing ahead with research on financial contagion that hadn’t received a warm reception from some colleagues. She presented her paper on the subject at the Federal Reserve’s 2012 symposium in Jackson Hole, Wyoming.
Forbes was the first woman to sit on the BOE panel since 2010, when Kate Barker’s term ended, and has since been joined by Nemat Shafik, deputy governor for markets and banking.