MNI: BOE Tenreyro - UK Productivity Risks Skewed To The Upside

-Tenreyro: Expects Couple of Bank Rate Hikes If Econ Evolves As BOE Forecast

By David Robinson

     LONDON (MNI) - Bank of England Monetary Policy Committee member Silvana

Tenreyro said Monday she anticipated a couple more Bank Rate hikes in the next

couple of years if the economy were to evolve in line with the MPC's central

forecast. 

     But she warned that if productivity growth differed from the MPC's

expectations this would alter the rate path.

     In her inaugural speech as an MPC member, Tenreyro told an audience at

Queen Mary College in London that the risks to the MPC's productivity forecast

were skewed to the upside. If productivity growth does turn out stronger than

the committee anticipated, at first glance that would suggest an even lower path

for Bank Rate, but Tenreyro said that the evolution of demand in response to

productivity changes would be key.

     "If the economy evolves as in our November forecast, with steadily

increasing domestic inflationary pressures, I expect perhaps a couple more

increases in Bank Rate will be required over the next three years. But a

different outturn for productivity growth would affect that policy rate path,"

Tenreyro said.

     The MPC hiked Bank Rate to 0.5% in November and her comments are consistent

with market expectations for it to crawl up to around 1.0% over the three year

forecast horizon.

     Productivity growth, however, is a wildcard with the MPC only anticipating

a gentle rise in productivity from its historically low levels. Tenreyro looked

at the evidence and concluded that productivity growth could be more robust than

this.

     She noted that just two sectors, finance and manufacturing, accounted for

the bulk of the UK's productivity slowdown. 

     The financial sector's drag on productivity should evaporate with

deleveraging ending and firms' and households' leverage ratios returning towards

historic norms. The global recovery should alleviate the pressure on investment

and productivity.

     "Strong global growth should help support a recovery, especially if

uncertainty were to be resolved," Tenreyro said.

     "In the medium term the risk to productivity may be skewed to the upside,"

Tenreyro noted.

     "The question from an MPC perspective will be how quickly demand responds,"

she added.

     London School of Economics Professor Tenreyro joined the MPC on July 5 last

year and her term runs until July 4, 2020. In November, she voted with the

majority on the committee in favour of a 25 basis point rate hike.

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

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