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-Risk Domestic Inflation Pressure May Be Less Than MPC Expected
By David Robinson
LONDON (MNI) - Bank of England Deputy Governor Jon Cunliffe said Tuesday
that he is currently placing less weight on the Bank's theories of how the
economy works and more on data outturns, and that the Monetary Policy Committee
could have waited until it was clear pay growth was rising before hiking Bank
Cunliffe was one of two dissenters at the MPC's November meeting, voting
against the 25 basis point rate hike. In a speech to the Oxford Economics
Society he highlighted the uncertainty at present over the historical inverse
correlation between unemployment and inflation, the Phillips curve, and said
that the MPC could have waited to see if pay growth rises in response to
exceptionally low jobless rates.
In light of "the serial disappointments we have had in recent years in
forecasting the impact of unemployment on pay growth, there is ... a not
immaterial risk that the trade-off is not as it currently appears and that
domestic inflation pressure will undershoot the Committee's collective
expectation," Cunliffe said.
His fellow deputy governor Ben Broadbent said at the November Inflation
Report press conference that he still believed the Phillips curve was in place,
but Cunliffe is sceptical.
Cunliffe maintained that the currently low inflation pressures, with
headline inflation driven up by first round effects from the fall in sterling,
gave the MPC the option of delaying tightening.
"The low level of domestic pressure on inflation now, the absence of second
round effects from the depreciation of sterling, and inflation expectations
around their historical averages, make it possible to wait before tightening
policy until there is clear evidence that pay growth is responding to the level
of unemployment in line with our forecast," Cunliffe said.
Even with two more hikes in Bank Rate factored into the Bank's forecast
headline CPI stayed above the MPC's 2.0% target throughout the three-year
Nevertheless, Cunliffe focussed on domestically generated inflation and
highlighted the deep uncertainty around the MPC's assumptions.
On the apparent leave of absence of the Phillips curve, he said it was
possible that the MPC had underestimated economic slack, that the curve had
moved lower and flattened or that it had simply disappeared altogether.
"Although it makes forward-looking monetary policy more difficult -- I tend
to put more weight on the evidence we can or cannot see in the data, and a
little less on the un-observables and on how we think the economy works,"
Headline pay growth has been subdued but the latest BOE agents survey did
report that firms expected pay deals to move higher in 2018, so Cunliffe may yet
get the evidence he wants to support tightening from the new year pay round.
--MNI London Bureau; tel: +44 203-586-2223; email: email@example.com