(Bloomberg) — Bank of England Deputy Governor Clare Lombardelli said policymakers should cautiously pursue interest rate cuts amid concerns that wage growth and inflation may not fall as quickly as ‘hoped.

In her first speech since joining the BoE earlier this year, Lombardelli said the UK had made “good progress on disinflation”, but that “the more persistent components of inflation and the uncertainties regarding the evolution of the labor market are a source of concern.”

“I view the probabilities of downside and upside risks to inflation as broadly balanced. But at this stage, I am more worried about the possible consequences if the hike materializes, as it could require a more costly monetary policy response.

Lombardelli, who voted with the majority in favor of a quarter-point rate cut to 4.75% at this month’s meeting, was speaking at the BOE’s annual observer conference in London. She supported the consensus within the Monetary Policy Committee that restrictive territories should be removed “gradually”.

The subject of his speech was the bank’s response to Bernanke’s review of the Bank of England’s forecasts, published in April. Former US Federal Reserve Chairman Ben Bernanke said an overhaul of modeling and data arrangements was needed as well as a new approach to communicating the bank’s forecasts.

Lombardelli, who is leading the BOE response, said: “This program is going to take time to implement – ​​years, not months. ” She added: “I think it would be a real mistake to be honest if we rush into it. »

On monetary policy, Lombardelli said the level of interest rates was “comfortably in restrictive territory at the moment” and supported “a gradual removal of monetary policy restrictions”, but data in the coming months will be critical and will require “careful observation”. Markets expect the bank to cut rates to 4% by the end of next year.

Wage developments remain of particular concern and the new Labor government’s policies have added to the uncertainty, she said. “There are signs that the process of wage disinflation may be slowing. It is therefore too early to declare victory over inflation. It’s often said that the last mile is perhaps the hardest, and that’s where we are right now.

The government’s plan to raise the minimum wage, its employment tax hikes and changes to workers’ rights have contributed to “great uncertainty” around the labor market and wage developments, a she added.

Employment costs

Employers have threatened to raise prices to cover the cost of a £26 billion ($32.7 billion) increase in employers’ national insurance contributions in last month’s budget, added to by a 6.7% increase in the minimum wage next April which risks driving up prices. pay the payments. The BOE’s own surveys have found that businesses are concerned about the effects of raising the minimum wage.

The situation is further complicated by problems with the official labor force survey, which make it difficult to assess how tight the labor market really is, she said.

Lombardelli also cautioned against reading too much into last week’s weak business activity data, which suggests the economy could be entering a recession that could require more rapid rate cuts. “I’m not getting a strong signal from any one release,” Lombardelli said, referring to the PMI flash.

Bernanke recommended moving from fan charts that provide a probability of different outcomes for the economy and inflation to scenarios that more clearly communicate how the bank would respond to different events. The BOE has since committed to using scenarios.

He also urged the bank to consider incorporating its own forecasts on how interest rates will move rather than slavishly following the market curve, which has complicated communication in the past.

Lombardelli said the review “some of it makes for uncomfortable reading” and indicated she is open to the idea of ​​using the BOE’s own rate projections with the new scenarios. “We will consider whether to publish the forecast with an endogenous path modeled for policy, either instead of or alongside a forecast conditioned on the movement of market interest rates,” she said.

Some economists have urged the BoE to follow the Fed’s “dot plot,” an anonymous representation of how each Fed policymaker sees interest rates moving. Lombardelli suggested that the BOE would not follow suit, saying it was “not as simple as it seems.”

–With the help of Irina Anghel.

©2024 Bloomberg LP