MNI INTERVIEW2: BOE Could Need 100BPS More Of Hikes-Ex-Staffer

The Bank of England could need to boost interest rates another full percentage point with inflation too high and wage growth far above levels consistent with price stability, former BOE economist David Aikman told MNI.

“Another 100 basis points or so doesn’t feel unlikely to me for the UK,” said Aikman, who spent 17 years at the UK central bank. “I find it hard to see how wage growth will moderate to a level consistent with the inflation target without creating a bit more slack in the economy.” (See MNI INTERVIEW: BOE Likely To Revise Up View Of Wage Growth)

The BOE has raised interest rates 14 times in a row to 5.25%, the highest since 2008. Aikman said policy dissents among members of the Monetary Policy Committee are a positive sign that represent “a strength of the architecture we have in the UK.”

The debate around the need for higher rates comes amid amid widespread public concern policymakers were slow acknowledging the inflation problem and acting on it.

“There is a question about the credibility of the Bank of England taking a serious hit in the public eye because of the scale of the shock that we’ve seen,” said Aikman, who is now director of the Qatar Center for Global Banking and Finance at King's College. “I’d say the Bank has widely been perceived as being behind the curve when dealing with the issues. So that’s already a very awkward position to be in.”

That leaves it in a more difficult position than peer institutions like the U.S. Federal Reserve, which also benefits from a much stronger growth backdrop than the UK’s, Aikman said.

MORE SEVERE TRADEOFF

“On the macro side, I think we’re behind the situation in the U.S.. One view is, hopefully we’ll have some bigger falls in headline inflation like you’ve seen. If you wanted to be more pessimistic, I think the tradeoff is more severe here,” he said.

“We’ve seen a very big labor-supply shock. Brexit has added to that shock in terms of people leaving the UK and the country being less attractive for immigrants.”

Aikman said financial stability risks in the UK were probably also worse than in the United States, where it would probably take a fresh reassessment of how high rates are likely to go for any disruptions like those that seized regional U.S. banks in March to resurface.

“In the UK I’m concerned about the debt position of the household sector as mortgages get repriced – that will happen quite quickly,” he said.