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MNI (London)
By David Robinson
     LONDON (MNI) - The following are five things we learned from the speech and
questions and answers from Bank of England Monetary Policy Committee member
Michael Saunders at the Financial Intermediary and Broker Association event.
     1) Saunders goes into 2018 leaving the door wide open to further
tightening. He said that he would not pre-announce any policy decision but after
this speech it would be no great surprise if he backed a rate hike in the near
future, even as early as February.
     A hike in the 0.5% Bank Rate would simply lift it towards neutral rather
than making overall policy restrictive.
     If the MPC made "a modest further rise in rates .. we would be gradually
lifting our foot off the accelerator, with no need to put the brakes on," he
     2) Saunders' speech highlighted the UK's shrinking labour supply, due to a
mix of the tightness of the labour market and the country's diminished pulling
power due to weak sterling and Brexit uncertainty. This shrinking supply is now
a hot topic at the Bank, with the findings of the Bank's agents and its Decision
Maker Panel business survey underlining the problems firms are experiencing
trying to hire staff. 
     The critical question for policymakers is what they think its impact will
be. The data are patchy on whether or not it is likely to drive up pay.
     3) Saunders is one MPC member who believes that tight labour market and
dwindling labour supply will result in faster pay growth than widely expected. 
     "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,"  he said.
     He added that pay growth could exceed 3%.
     4) Saunders in the question and answer session said that he was "not giving
a steer" on whether market interest rates would rise faster or slower than
markets were expecting. 
     The November 25 basis point rate hike was well-trailed by the MPC, with
members signing up to the line that a move was likely "in coming months." In
2018 the MPC may be markedly less explicit in the guidance it gives over the
likely timing of hikes.
     5) A key part of the February Inflation Report will be what it concludes
about how much slack is left in the economy and how persistent and pronounced
the decline in labour supply is likely to be.
     The Bank has said that the Inflation Report will include its supply
stock-take and Saunders said that it would cover "prospects for productivity,
equilibrium unemployment, migration and labour supply."
     If the conclusion is that there is little, if any, slack left this could
pave the way to near-term tightening.
--MNI London Bureau; tel: +44 203-586-2223; email:
MNI London Bureau | +44 203-865-3812 |