BOE's Saunders Says U.K. Wage Growth Likely to Remain Low

  • Natural rate of unemployment in Britain has declined
  • U.K. jobless rate has fallen to an 11-year low of 4.8%

The drop in the U.K. unemployment rate is less likely to fuel inflation through faster wage growth in the next few years, Bank of England policy maker Michael Saunders said.

The job market may see more subdued growth in pay and unit labor costs than officials forecast in November, and the economy can run with a lower unemployment rate than previously thought without generating inflation, said Saunders, a member of the interest-rate-setting Monetary Policy Committee.

“My hunch is that underlying pay growth will probably stay below the 4 percent pre-crisis norm during the next few years, unless the economy is strong enough to pull unemployment significantly lower and/or long-term inflation expectations rise markedly,” he said in a speech in London.

The comments suggest that Saunders, who joined the MPC in August, won’t be quick to push for an interest-rate increase this year. The BOE predicts that the vote to leave the European Union last June will soon start slowing growth, while the weaker pound will drive inflation above target in the next few months.

With U.K unemployment at an 11-year low of 4.8 percent, below the MPC’s 5 percent estimate of its natural rate, the question for BOE policy makers is how long the labor market can continue to improve without fueling more intense inflationary pressures.

Stronger Market

The BOE predicts that Brexit uncertainty will likely damp hiring over the next few years, and it forecast in November that joblessness will rise to 5.4 percent this year. But with the economy performing better than expected, Saunders said he saw the labor market being stronger than that.

“It seems quite possible to me that the jobless rate will stay below 5 percent this year,” he said.

While it may be tempting to point to low inflation as the single biggest cause of low wage growth in recent years, structural changes in the labor market including job flexibility and insecurity may also be depressing factors, Saunders said.

The attractions of working in the U.K. for foreigners -- including its high wage levels and low unemployment -- means that labor supply has expanded with little upward pay pressure, he said, though prospects for inward migration to Britain in the next few years are uncertain.

Policy makers have said that they will tolerate some overshoot of inflation this year to protect jobs and growth. BOE Governor Mark Carney has warned that the U.K. would have lost more jobs if the BOE hadn’t acted with stimulus in August after the Brexit vote.

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