Bank of England’s Cunliffe sees case for ‘stodginess’ in setting interest rates

By David Milliken

LONDON (Reuters) – Bank of England Deputy Governor Jon Cunliffe sounded a note of caution about raising interest rates on Friday, saying there was limited evidence that wages were rising as fast as the BoE forecast earlier this year.

Weak economic growth in the first three months of 2018 increasingly looked to be down to bad weather and “very material” uncertainty about Brexit was not a reason on its own to delay raising rates, Cunliffe said.

Sterling inched higher against the dollar after his remarks.

However, Cunliffe — who voted against the BoE’s last rate rise in November — said policymakers needed to be wary of “false dawns” promising wage growth, which has disappointed before.

Faster increases in pay are central to the BoE’s forecast that domestic price pressures will keep inflation above target unless it raises rates.

“Looking to the medium term, there remains a case for a little ‘stodginess’ yet,” Cunliffe said in a speech, referring to advice given in 1999 by former U.S. Federal Reserve vice chairman Alan Blinder that central banks should be cautious about raising rates at uncertain economic times.

Most economists polled by Reuters expect the BoE to raise rates again after its next meeting in August, for only the second time since the 2008 financial crisis.

Cunliffe said the economy seemed to be growing about as fast as the BoE predicted in May. But wages appeared to be rising by about 2.5-3 percent a year, not the 3 percent annual rate the BoE had forecast.

“We may still be underestimating supply in the labor market,” Cunliffe told an audience of business representatives in Kendal, northwest England.

“(This) implies a bias to needing a little more confirmation at each stage that the supply side is evolving as we have forecast – a somewhat higher burden of proof that I hope will diminish as we learn more,” he added.

Cunliffe said he would assess the evidence on domestic inflation pressures at August’s meeting, and that the central bank had not taken “a stopped approach” to raising rates.

However, he said policymakers should not rule out a recovery in weak productivity growth which would take some steam out of inflation pressures, reducing the need for higher rates.

In addition, there was no case for pre-emptive increases in rates to give the BoE greater scope to cut them in a downturn, as unnecessarily high borrowing costs would damage the economy, Cunliffe said.

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