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By David Robinson
     LONDON (MNI) - With the UK's expected interest rate path showing only very
gentle increases, it was possible to delay a rate hike for a short-time at
little cost, Bank of England Monetary Policy Committee (MPC) member Silvana
Tenreyro said Monday.
     She warned, however, of the risks of an overshoot of the MPC's 2.0% target
if the delay in tightening was prolonged.
     Tenreyro said that when the optimal path was relatively flat it was "easier
for policy to achieve the same effect with a path of rate rises later that is
still gradual. The flexibility is limited, however - waiting a few more quarters
increases the likelihood that inflation overshoots the target."
     Tenreyro said that model simulations showed that similar inflation outturns
could be generated via different rate paths. In May, she was one of seven of the
nine MPC to vote against a rate hike.
     Growth was negligible in the first quarter with official GDP numbers
showing it rose only 0.1% on the quarter but this weakness may prove ephemeral.
     "In May, I felt that .. the costs of waiting a short period of time for
more information were small. And because unusually, we are likely to get a
significantly clearer picture of the underlying strength of domestic demand
quite soon, there were benefits to leaving policy unchanged," Tenreyro said in a
speech at the University of Surrey.
     The Bank's models did not show significantly different inflation outturns
if rate hikes are delayed for a short while.
     "It may be possible to achieve very similar outcomes for inflation with
somewhat different paths for Bank Rate. This is possible because to some extent,
future changes in policy can act as substitutes for immediate changes," Tenreyro
     On the specifics of the economic outlook Tenreyro said that she believed
that reports of the death of the Phillips curve, that posits a negative
correlation between unemployment and inflation, were exaggerated. With the
labour market continuing to tighten she expected pay growth to rise.
     "I expect this (labour market tightening) to translate into a pickup in
domestic cost pressures. Indeed, annual private sector regular pay growth
reached 3% in March, while evidence from the distribution of wage growth also
signals greater strength," she said.
--MNI London Bureau; tel: +44 203-586-2223; email:
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MNI London Bureau | +44 203-865-3812 |