MNI: BOE Cunliffe: Can Delay Hiking Until Clear Pay Growing

-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

Rate.

     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

forecast horizon.

     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,"

Cunliffe said.

     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: david.robinson@marketnews.com

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