‘Further evidence’ needed to show wage growth is falling, Bank’s Broadbent warns
The Bank of England needs “further evidence” that wage growth is decisively cooling before cutting interest rates, a member of the Monetary Policy Committee (MPC) said today.
In a speech delivered at the London Business School, Ben Broadbent, a deputy governor at the Bank, warned that the “slightly muddy picture” on pay growth meant policymakers needed to be cautious.
“Given the volatility in the official estimates [of wage growth], and the disparity (such as it is) among the various indicators we have, it will probably require a more protracted and clearer decline in these series before the MPC can safely conclude that things are on a firmly downward trend,” he said.
Wage growth has become an increasingly important proxy for the Bank of England for how inflation will develop.
Over its recent MPC meetings, the Bank has pointed a high levels of wage growth and a tight labour market as justification for keeping rates on hold for longer than markets expect.
Looking at all the sources of data on wage growth, Broadbent argued that it was “significantly faster” than rates consistent with the Bank’s two per cent inflation target.
The most recent set of figures showed that annual wages climbed 7.3 per cent in the three months to October.
This was down on wage growth approaching eight per cent over the summer while other surveys, such as the REC survey, have also pointed to a slowdown.
But Broadbent warned “the noisiness of these measures, and the discrepancies between them must also inject a degree of caution about the more recent decline”.
Broadbent noted that the MPC has paid more attention to wage growth as uncertainty over the supply side of the economy – such as productivity growth and the natural rate of unemployment – has grown in recent years.
This has forced the Bank to take a “more delayed” approach than in a world of “perfect and complete information,” he said.
“There are clearly risks in moving only when you see ‘the whites of inflation’s eyes’,” he said. “But it may still be a price worth paying”.