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MNI POLICY: BOE Tenreyro Says Virus Boosts Deflationary Forces

-Tenreryo Sees Covid-19 Reinforcing Weaker Unit Wage Costs in Consumer Sector
-Tenreyro: Oil Plunge Made Sub 1% CPI Likely in Next Couple of Months
By David Robinson
     LONDON (MNI) - The impact of coronavirus is likely to supercharge the
weakness of unit wage costs in the UK consumer sector, pushing down on
inflation, Bank of England Monetary Policy Committee member Silvana Tenreyro
said on Thursday.
     An acceleration in online shopping and an increase in working from home in
response to the coronavirus would reinforce the switch to lower cost online
retailing and push down on high street rents. While the overall impact of the
virus's impact on prices was uncertain, she suspected it would be deflationary.
     In a question-and-answer session following her speech Tenreyro said there
were inflation "forces pushing in both directions," with offsetting effects from
sterling weakness and supply hits, but added that, if pushed, she believed that
"The balance is leaning towards more deflationary pressures."
     Headline CPI inflation was already set to fall below 1% in coming months
because of the impact of the fall in oil, she said.
     She refused to endorse the view that more stimulus was inevitable, saying
"at this stage we don't know where inflation will land and whether there will be
a need for more or less policy tightening."
     Asked what form it was likely that the economic recovery would take she
said that "it looks like the exit will be less V-shaped than one would want and
the question is how long is the bottom of the U."
     The MPC is currently working on its economic projections for its May
Monetary Policy Report.
     The core of Tenreyro's speech was that structural factors which were
weighing down on inflation before the pandemic struck might become more
permanent after it.
     Her research found that one part of the answer to the puzzle of why
aggregate unit wage cost growth had picked up but inflation had not was that
unit wage cost growth was more subdued in consumer facing sectors that had the
biggest impact on the CPI inflation basket.
     "If weaker unit cost growth in consumer facing sectors relates to the
growth of (more efficient) online retail, then we might expect to see this
effect supercharged by recent developments," Tenreyro said.
     She warned that CPI data in the near term would be noisy and hard to
interpret, in part because the goods and services used in the CPI basket
reflected pre-virus spending patterns, with spending in the hospitality sector,
for example, now non-existent.
     But the triumph of deflationary forces was far from inevitable, Tenreyro
     "It is also conceivable that some large changes in relative prices affect
inflation in the other direction. Moreover, sterling has depreciated, and fiscal
policy has been loosened, both of which will push up on inflation, other things
equal," she said in her speech.
     If inflation did overshoot the 2.0% target, Tenreyro said the MPC would
then face a decision about how fast to return CPI to target, with its framework
giving it the flexibility to look through temporary overshoots.
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$B$$$,M$E$$$,MT$$$$,M$$BE$]

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