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Wednesday, July 6, 2022

Low inflation pushing down UK wage deals, Bank of England’s McCafferty says

By David Milliken

LONDON (Reuters) – British wage growth is being pushed down by low headline inflation, but could bounce back fast once prices start to rise more quickly, Bank of England policymaker Ian McCafferty said on Wednesday.

McCafferty stopped voting to raise interest rates in February and rejoined the consensus on the Monetary Policy Committee, as wage growth no longer looked likely to accelerate as fast as he had expected.

In a speech at the central bank on Wednesday, he said he expected to vote again for higher interest rates at some stage, but could not say when as “uncertainty surrounding the evolution of the economy over the coming months is particularly acute”.

Britons vote in June on whether to leave the European Union, and most polls show only a small lead for the “Remain” camp.

“Very recently there have been some signs that increased uncertainty linked to the outcome of the EU referendum … may weigh on investment in coming months, such that we may see a slight softening in GDP growth through the summer,” McCafferty said.

BoE Governor Mark Carney said on Tuesday that foreign investment in British commercial real estate had ground to a halt in recent months due to concerns about a possible Brexit.

The main focus of McCafferty’s speech was the role low inflation was playing in ensuring keeping down growth in wages, which he described as “disappointingly weak”.

British consumer price inflation averaged zero last year, its lowest on record, and only crept up to 0.5 percent in March, far below the BoE’s 2 percent target.

McCafferty said that firms he had spoken with had said that they were using current inflation rates as a starting point for wage bargaining, as they were unable to raise prices.

This process should go into reverse once last year’s fall in oil prices stopped weighing down on inflation, he said.

“A pick-up in price inflation should lead to a correspondingly faster bounce in wage growth,” McCafferty said.

“Although the point at which this wage acceleration should begin has been pushed out by the changes in our forecasts for price inflation …. it still poses a risk of an inflation overshoot in the third year of our forecast,” he added.

(Reporting by David Milliken, editing by Andy Bruce)

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