MNI: BOE Broadbent: Untrue Brexit Entails Lower Interest Rates

--Broadbent: faster wage growth likely from tighter labour market 

By David Robinson

     LONDON (MNI) - It is not inevitable that the Brexit process will result in

lower interest rates and a tighter labour market is likely to result in faster

earnings growth, Bank of England Deputy Governor Ben Broadbent said in a speech

at the London School of Economics Wednesday.

     Broadbent said that market participants appeared to have underestimated the

likelihood of UK monetary tightening, and one reason was their assumption that

disruption from Brexit would result in policymakers being reluctant to sanction

rate hikes. By disrupting the supply side and driving down the currency Brexit

could add to inflationary pressures, putting upward pressure on interest rates,

Broadbent said.

     The effects of Brexit on inflation are "certainly too complex to justify

the simple assertion that Brexit necessarily implies low interest rates,"

Broadbent said. 

     Broadbent, who overseas Monetary Policy at the Bank, was in the majority on

the MPC who voted for a 25 basis point hike at the November meeting and in his

speech he also rejected the view that the Phillips curve, which assumes an

inverse correlation between inflation and unemployment, was redundant.

     The MPC eased policy in August last year following the Brexit vote because

of sharp, and as it turned out short-lived, falls in business and consumer

confidence. Since then inflation has been driven up over the 2.0% target by the

fall in sterling, reflecting foreign exchange market pessimism over Brexit while

consumers have been more upbeat.

     "Current inflation is in part the result of a divergence between the

effective expectations of consumers and those in financial markets. If those

expectations were to re-converge, from either end, inflationary pressure would

diminish," Broadbent said. 

     "If they diverge further the opposite would happen," he said.

     Business pessimism over Brexit would impact investment, purchasing and

ultimately productivity.

     Broadbent's colleague, Deputy Governor Jon Cunliffe, said Tuesday he had

voted against a rate hike in part because of deep uncertainty over whether wage

growth will accelerate despite historically low unemployment.

     Broadbent argued, however, that the Phillips curve was probably still

relevant.

     "All else equal, a tighter labour market is likely to mean faster wage

growth," he said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$$BE$]