By Laurie Laird
LONDON (MaceNews) — Two Bank of England rate setters have suggested that UK recovery has become sufficiently entrenched to warrant a reduction in monetary accommodation.
Forward guidance set at the latest Monetary Policy Committee meetings “no longer rules out tightening,” said external MPC member Michael Saunders, adding that conditions on tightening policy “have now been met.”
At the past two rate-setting meetings, MPC members agreed to withdraw stimulus only after “there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”
While a rise in the Bank’s base rate, currently at a record-low 0.1%, may not be necessary until next year, according to Saunders, “the question of whether to curtail our current” asset purchase programme “will be under consideration at our forthcoming meetings.” The Monetary Policy Committee next meets in three weeks, with its decision scheduled for release on 5 August.
Saunders has long been considered one of the more dovish members of the MPC, advancing the case for negative UK interest rates as recently as February. But inflation has accelerated much more quickly than the Bank expected, rising to an annual rate of 2.5% in June, according to data released on Wednesday, far exceeding the Bank’s 2.0% percent target.
The Bank expected inflation to peak at just over 2%, before returning to target by year-end, according to forecasts released in May, predictions that now look dated. “Inflation now looks likely to peak well above 3% and maybe nearer to 4%,” said Deputy Bank of England Governor Dave Ramsden on Wednesday.
Ramsden also suggested — albeit more gently than his MPC colleague Saunders — that a reduction in monetary accommodation may come more quickly than the Bank has signalled. “I can envisage those conditions for considering tightening being met somewhat sooner than I had previously expected,” he said. “On balance, I put more weight on my inflationary than disinflationary scenario.”
However, Governor Andrew Bailey appeared more relaxed about inflation in an interview with online regional news agency BusinessLive published on Thursday, when he was forced to deny that the BoE has adopted a “casual” stance toward rising inflation. “We’re following it extremely closely. It is our job to unpick the story and then seek to see what we can draw from it,” he said.
Bank of England officials have stressed that inflation expectations remain well anchored near target levels, however surging wage growth could complicate forecasts. Average earnings rose an annual rate of 7.3% in the three months to May, the highest on record, according to data released earlier on Thursday, and BoE economists see wage growth rising as high as 8%.
However, wage growth has been boosted by both easy comparisons with depressed year-ago levels and a so-called compositional effect, with lower-paid workers most likely to have lost jobs during the pandemic. The UK Office for National Statistics estimates underlying wage growth at between 3.2% and 4.4%.