BOE's Saunders Sees Labor Tightness Boosting Pay Growth in 2018

  • U.K.’s unemployment rate may drop below 4% this year
  • Says BOE rate still below neutral after November rate hike

Michael Saunders indicated he remains at the hawkish end among Bank of England policy makers, predicting that a stronger U.K. labor market will boost pay growth and hinting at an even greater chance of the economy overheating.

Saunders said Wednesday that potential growth could be weaker than currently estimated, tapping in to one of the key arguments behind the BOE’s interest-rate increase in November, when it said a reduced “speed limit” meant a greater chance of domestic price pressures building.

While he didn’t spell out his intentions for future meetings, the comments suggest he may favor a faster pace of tightening than some others on the Monetary Policy Committee. The BOE raised its key rate in November, though Saunders had been pushing for a move earlier.

He said on Wednesday that the jobless rate may drop below 4 percent this year and underlying earnings growth could accelerate to 3 percent or above.

“If the economy turns out broadly in line with the outlook I have described -- labor market tightness and signs of higher pay growth -- I consider it likely that interest rates will need to rise further over time,” he said in London. He added that the BOE’s benchmark rate, at 0.5 percent, is still below its neutral level.

Heating Up

Concern that reduced potential growth could lead to an overheating economy drove the BOE rate hike late last year. Saunders said potential may be even lower than the 1.5 percent estimated, partly due to fewer workers arriving from the EU after the Brexit referendum in 2016.

While he noted the impact of weak U.K. productivity growth, he said the economy isn’t locked into a persistent pattern. However, an improvement will need greater investment and, right now, “there is little sign that these are changing dramatically.”

Those comments come within days of a speech by MPC colleague Silvana Tenreyro, who said that productivity growth may rise quicker than currently expected, which would have implications for the pace of rate increases.

On Brexit, Saunders said that progress in negotiations will affect the U.K.’s economic prospects, and therefore BOE policy, in either direction.

“It is certainly not correct to assume that ‘good’ or ‘bad’ Brexit news automatically implies that interest rates must go in a particular direction,” he said. “The MPC has tools to respond either way as needed to changes in the economic outlook.”

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