A key judgment for the MPC is to see how fast wage growth picks up in time and how it will impact the medium-term inflation outlook, Bank of England Governor Mark Carney said today.
The Bank of England (BoE) has no pre-set course and the timing of any increases in interest rates will be determined by the data, Governor Mark Carney reiterated on Wednesday in his speech in Glasgow.
Carney also said wage growth indicators suggest "there was more labor supply while spare capacity is being used up a bit more rapidly than expected." Therefore, the key to the monetary policy decisions in the upcoming months will be how those indicators "will translate into real wage growth, and in turn that wage growth into price pressures," Carney said.
On sustainable growth and productivity, Carney said that "a durable expansion rests ultimately on moving from anemic to strong productivity growth. Only that can improve export competitiveness and underpin consistent increases, rather than falls, in real wages. To generate needed productivity growth will require recent strong business investment growth of 10% over the past year to be sustained."
On the BoE's role in supporting investment plans in the medium-term, Carney said "the MPC is supporting investment through clear guidance that it expects increases in Bank Rate, once they begin, to be gradual and limited ... This guidance puts all the short-term noise about when the first rate rise will be into its proper context and it encourages firms to hire and invest with an eye to the medium term."
On medium-term interest rates, Carney said their level will remain below the historical standards seen from before the 2008 financial crisis.
Carney also named several factors posing risks once the economy moves away from the record-low rates environment: "public balance sheet repair, a highly indebted private sector sensitive to interest rates, drag from a 12% appreciation of sterling over the past year, and the persistent muted demand from our main export markets." But the biggest risk Carney said stems from the UK's housing market and the prospects for household indebtedness.
Slight turn to dovishness in MPC minutes
Carney's speech today in Glasgow comes after the Monetary Policy Committee (MPC) minutes release which showed the debate between doves and hawks at the MPC has intensified. With the three new MPC members sitting at the roundtable in August, it is hard to see what their stance to policy is at the moment.
For some members, a premature tightening in monetary policy might leave the economy vulnerable to shocks, with the effectiveness of any further stimulus uncertain. Weak wage growth is also seen among the primary reasons for keeping policy loose.
"The weakness of wages in the face of a strong rise in employment was becoming more striking, and there was reason to believe both that reductions in labour market slack were taking longer to affect wage growth, and that the effective supply of labour had increased," the minutes said.
For other MPC members, "the risk of a small hike in the Bank Rate derailing expansion and leaving inflation below the target in the medium term was receding, as that expansion became more established with some wage growth surveys showing increases," according to the July MPC minutes.