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-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
"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: email@example.com