MNI: BOE Vlieghe: Tight Labour Market Driving Up Domestic Infl

-MPC Outlook Consistent With One or Two Hikes Per Year Over 3 Year Horizon

By David Robinson

     LONDON (MNI) - The UK'S tight labour market is putting upward pressure on

domestically generated inflation and the outlook is consistent with one or two

rate hikes per year over the three-year forecast horizon, Bank of England

Monetary Policy Committee member Gertjan Vlieghe said.

     Vlieghe said that the evidence showed that at a sectoral level "the

unemployment rate is a highly significant driver of wage growth" and UK

unemployment has fallen to within touching distance of the MPC's estimated

equilibrium, or non-inflationary, jobless rate.

     "Provided evidence continues to accumulate that a tight labour market is

actually pushing up domestic inflationary pressures, I expect that Bank Rate

will need to rise further over the forecast period," Vlieghe said in a speech in

Birmingham.

     "The current central outlook is, in my view, consistent with one or two

quarter point rate increases per year over the forecast period. Such a path

would bring us closer to the neutral policy rate, which I continue to think is

likely to be well below the neutral rate that prevailed in the pre-crisis

decades," he added.

     In his speech Vlieghe argued strongly that the Phillips curve is not dead

and that inflation does rise with falling unemployment.

     UK inflation rose to a percentage point above the 2% target primarily due

to higher import prices as a result of sterling weakness. This effect is fading

but Vlieghe believes stronger domestically generated inflation will offset this,

necessitating tighter monetary policy.

     "While there are probably still further import-driven price rises to come,

we are at the peak of the rate at which those prices rises are coming through.

That means that the impact on the rate of CPI inflation (as opposed to the

impact on the level of consumer prices) should ease back over the course of this

year," he said.

     However earnings growth looks set to accelerate and markets are now

assuming that the next rate hike will come as soon as May.

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

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