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MNI (London)
--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
     "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:
[TOPICS: M$B$$$,M$E$$$,M$$BE$]
MNI London Bureau | +44 203-865-3812 |