MNI: BOE Saunders - Further Rate Hike Wouldn't Be Restrictive

--Pay Growth Likely To Overshoot Consensus 2.6% in 2018; 2.8% in 2019

By David Robinson

     LONDON (MNI) - The labour market is likely to tighten further, with pay

growth rising faster than consensus, and another rate hike would not be

restrictive, Bank of England Monetary Policy Committee member Michael Saunders

said Wednesday.

     Saunders, in a speech to the Financial Intermediary and Broker Association,

noted that firms have reported more intense recruitment difficulties, adding

that he expected pay growth to pick up a bit from current levels, lifting it

higher than expected by the bulk of external economists. He left the door wide

open to further hikes in Bank Rate, while avoiding any comment on the likely

timing of the next move.

     "Pay growth in 2018 is likely to stay well below the pre-crisis norm of 4%

or so. But, I suspect it is more likely to overshoot than undershoot the

external consensus, which is for AWE (average weekly earnings) growth of 2.6% in

2018 and 2.8% in 2019," Saunders said.

     The MPC member noted that the level of UK potential, or non-inflationary

growth, is way below historic norms. He said that UK potential growth may now be

below 1.5%, which would entail that even the 0.4% quarterly growth seen in the

latest official data could push up on inflation.

     --BREXIT IMPACT

     Net immigration into the UK, in the wake of the EU referendum vote and the

plunge in sterling, has fallen choking off labour supply growth.

     "The drop in inward migration seems to be adversely affecting workforce

quality, which may cap future productivity gains," he said.

     Pay growth disappointed MPC estimates in 2017 but Saunders stressed that it

lags changes in the labour market. Labour market tightening last year could feed

through to higher pay growth this year.

     He said that the Brexit effects in coming months could go either way,

depending on if and when the fog of uncertainty lifts over the likely shape of

the final deal and a transition deal.

     "If the economy turns out broadly in line with the outlook I have described

- labour market tightness and signs of higher pay growth - I consider it likely

that interest rates will need to rise further over time," Saunders said.

     --MPC STOCK TAKE

     The MPC will do a supply-side stock take for its February Inflation Report

forecast round and Saunders said he would not pre-announce his policy votes.

     He added that he was confident that Bank Rate, at just 0.5%, was below its

neutral level.

     "It follows that a modest further rise in rates would still imply a shift

towards neutral, rather than an outright move to a restrictive policy stance. We

would be gradually lifting our foot off the accelerator, with no need to put the

brakes on," he concluded.

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

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