Newest BOE Rate Setter `Relaxed' About Keeping Benchmark on Hold

  • Pay growth needs to increase before rates rise, Vlieghe says
  • Markets don't price rate increase in until after January 2017

Gertjan Vlieghe, the newest rate setter at the Bank of England, said he’s “relaxed” about keeping the benchmark at a record low for now.

Economic growth has to “stabilize or even pick up a bit” and wages need to rise more strongly before the bank should consider its first rate increase since 2007, Vlieghe said in an interview with the Sunday Times newspaper.

“I am relaxed about waiting a little longer before we start,” he said. “We’ve seen a little bit of disappointment on wage growth.” A clearer “direction of travel” on pay is needed, with wage growth perhaps accelerating to above 3 percent, he said.

As the Federal Reserve moves toward a rate increase as soon as December, investors are speculating on when the U.K. central bank will follow suit. While domestic demand is robust, officials trimmed their growth and inflation forecasts this month, citing, among other things, risks from emerging markets.

Forward contracts based on the sterling overnight index average aren’t fully pricing in a rate increase until after January 2017.

In separate comments, BOE Governor Mark Carney said growing real incomes were driving domestic demand but that the U.K. economy was facing “some real headwinds” from abroad. His remarks were reported by the Gazette newspaper during a visit to Middlesbrough, northeast England.

Data last week showed household spending rose 0.8 percent in the third quarter, while net trade had the biggest negative impact on growth on record. The economy grew an unrevised 0.5 percent from the previous three months.

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