UK inflation risks have increased because of stronger than expected pay growth, a senior Bank of England rate-setter said, as he emphasised the need to proceed with “gradual” monetary policy easing.
Dave Ramsden, a deputy governor at the BoE and one of the more dovish members of its rates committee, said he now saw more “two-sided” risks to the inflation outlook, adding that he had become less certain about the outlook for the UK’s labour market.
Pay growth has overshot BoE expectations and the central bank predicts consumer price inflation will accelerate to 3.7 per cent later this year, complicating its plans for lower interest rates. The BoE trimmed rates by a quarter-point in February while predicting a combination of sluggish growth and a pick-up in inflation.
Ramsden dissented from the majority of the Monetary Policy Committee at its December meeting, when rates were held, by advocating a quarter-point rate reduction. At the latest meeting he voted with the majority for rates to be lowered to 4.5 per cent.
“Compared with my position throughout last year I am now less certain than I was about the outlook for the UK labour market, and its implications for future inflation persistence and growth,” Ramsden said in a speech in South Africa on Friday.
“Because of the evidence of recent months I no longer think that risks to hitting the 2 per cent inflation target sustainably in the medium term are to the downside. Instead, I think they are two-sided, reflecting the potential for more inflationary as well as disinflationary scenarios.”
Ramsden said he had seen some “concerning developments” in short-term indicators, particularly on wages. Fourth-quarter annual growth in private sector earnings rose to 6.2 per cent from 4.9 per cent in the three months to December.
Ramsden said pay growth should stay at that level in the current quarter, a full 2 percentage points higher than expected a year ago. At the same time, however, with falling vacancies and slowing job growth, Ramsden said labour demand could continue to ease “much more materially in the near future”.
He added that his central view was that the disinflationary process remained intact.
“Given the increased uncertainty and risks to inflation on both sides — from the near-term outlook to inflation, and from developments in the global economy — I am even more certain than I was that taking a gradual and careful approach to the withdrawal of monetary restraint is appropriate,” said Ramsden.
