There is no need to contemplate raising interest rates soon, according to a prominent monetary policymaker on Wednesday, because consumer finances are increasingly squeezed and the rise in inflation appears temporary.
Speaking to Bloomberg in London, Gertjan Vlieghe, an external member of the Bank of England’s Monetary Policy Committee, hit back at critics of the central bank’s post-referendum forecasts, saying the errors had been “small”.
Long seen as a “dove” on the MPC who is in favour of lower interest rates, Mr Vlieghe’s views are aligned with the majority of the Committee, suggesting financial markets have over estimating the chances of an interest rate rise in the year ahead.
The MPC member noted how the central bank’s forecasts had shifted from a “sharp slowing” a month after the EU referendum to a “much milder and more protracted slowing” now.
“I have been quite puzzled by the repeated attacks on economic experts, forecasters and models, based on these relatively small forecast errors,” he said.
The outlook for inflation depended on how far and how quickly retailers passed on higher costs of imported goods, following sterling’s 12 per cent fall after the referendum, and whether wages followed prices upwards.
Wages, Mr Vlieghe added, show “no sign of sustained upward momentum yet”, suggesting that “despite better than expected growth, we have not had higher than expected underlying inflation pressure”.
Without signs of inflation bubbling under the surface, he said there was no need to reverse the interest rate cut to 0.25 per cent of last August and the resumption of pumping money into the UK economy to provide stimulus.
“Inflation is set to rise, but that seems entirely accounted for by exchange rate pass-through, which, although persistent, will ultimately fade,” he said.
Subdued wage pressure implied that household income growth after taking inflation into account would decline from an annual rate of roughly 3 per cent over the past two years to zero.
This squeeze on household incomes was “a big shift” and families were already responding by slowing their growth of consumption, as originally forecast by the BoE.
“The consumer slowdown, which initially did not materialise, now appears to be under way. Given the hit to real income from a mix of subdued wage growth and rising inflation, I think the slowdown is more likely to intensify than fade away,” Mr Vlieghe said.
Because the BoE could quickly raise rates if his assessment of the economic landscape was wrong, but could not easily fight off a deep slowdown if it raise rates prematurely, he said the MPC should adopt “a cautious strategy on interest rates”.
He said the only reason to raise rates would be if inflationary pressures appeared to spread beyond retailers passing on higher costs to consumers or if household credit growth began to grow even faster.
(You can read the speech in full here.)