Bank of England Chief Economist Huw Pill said the UK could experience a “positive demand shock” as rock-bottom unemployment leaves workers with more to spend.
(Bloomberg) — Bank of England Chief Economist Huw Pill said the UK could experience a “positive demand shock” as rock-bottom unemployment leaves workers with more to spend.
In a video conference hosted by Market News, Pill said that the tight labor market would be “supportive of consumption.” While this could help bolster the UK’s lackluster growth, it may cloud the picture for inflation which is still more than five times the bank’s 2% target.
Pill said inflation is likely to drop sharply this year despite a “material upside surprise” reported last month. But “recent releases serve as a reminder that the precise path of inflation may be bumpier than we expect,” Pill said in the text of the speech released by the BOE in London on Thursday.
“Because we think there is a relatively strong relationship between unemployment and precautionary saving, the fact that the outlook on unemployment is less pessimistic … we think that is supportive of consumption,” he added in a question-and-answer session following the speech. “So that’s a space where a positive demand shock, or positive demand dynamic at least, may be emerging.”
The remarks are in step with Pill’s previous assertion that he doesn’t intend to guide markets on the central bank’s next decision because policy makers will make up their mind based on the data. After the quickest series of interest rate rises in three decades, BOE officials are now weighing whether to slow or pause that tightening.
Pill insisted that the BOE’s string of 11 interest rate hikes, taking the key rate to 4.25%, were “weighing on inflation.”
“Right now, I am worried about inflation being too high because we need to get back to target,” Pill said. “But in doing that, we need to recognize there is scope to do too much as well as too little.”
Pill also said:
- Officials are seeing some signs of tighter financial conditions.
- Wage growth is likely to slow in the months ahead and continue slowing for some time.
- Data from purchasing managers suggest some room for employment growth, but other indicators imply greater uncertainty.
- The BOE still expects gross domestic product to drop 0.1% in the first quarter despite figures released earlier Thursday that show no growth in February and stronger output in January.
The persistence of inflation was a “key focus” in judging where monetary policy needed to go ahead of the Monetary Policy Committee’s next meeting in May, Pill said.
At 10.4%, inflation accelerated unexpectedly in February. MPC members are becoming worried that tightness in the labor market is encouraging workers to bargain for higher wages, in turn fueling domestic price rises.
“While unemployment rates have remained close to historical lows, we have seen some turnover or turning point in other measures,” said Pill, mentioning the number of people who were moving into jobs and out of economic inactivity.
After a huge rise in wages, which still failed to keep up with inflation, Pill said there was a “clear sign of some turning in wage momentum.”
But Pill said he was worried that the moderation had now become stuck, leaving wages rising at a rate which was still too high to be consistent with getting inflation back down to 2%.
He said it was an “open question” whether this would be enough to halt inflation. The MPC, he said, is divided on whether the economy needs higher unemployment to return the Consumer Prices Index to target.
–With assistance from Elina Ganatra and Andrew Atkinson.
(Updates with comments from the speech and Q&A from first paragraph.)
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