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Uncertainty over the state of the UK’s labour market will force the Bank of England to wait longer before it can safely conclude inflation is on the way down and cut interest rates, according to a senior official.
Ben Broadbent, a deputy governor of the central bank, said on Monday that volatile, inconsistent data had made it hard to tell how fast wages were growing and why — crucial questions for the BoE’s Monetary Policy Committee to gauge underlying inflationary pressures.
This kind of uncertainty could be “very costly” for the economy, he told an audience at the London Business School, because it affected the setting of interest rates.
“One implication . . . is that, in response to any given shock, the reaction of policy is likely to be somewhat more delayed than in a world of perfect and complete information,” said Broadbent.
His comments underline the frustration of policymakers over data problems that have left them unable to answer key questions about the forces driving the UK economy.
The BoE held interest rates at a 15-year high of 5.25 per cent last week and struck a more hawkish note on the outlook for the cost of borrowing than either the US Federal Reserve or European Central Bank, warning there was still “some way to go” before it could be confident inflation was under control.
Financial markets are at present pricing in about 1.15 percentage points of cuts by the BoE by December next year.
The most important question for the BoE is whether rapid wage growth will continue to fuel prices of labour-intensive services, even as global energy and goods price inflation continues to ease.
To answer this, Broadbent argued, policymakers needed to know whether wages had been rising mostly as a one-off response to the sharp rise in consumer prices or mostly because the jobs market had been so tight, with workers in short supply.
If the former was true, wage growth should soon slow, Broadbent said. If the latter was true, the UK would need “a longer period of below-trend growth — possibly with corresponding consequences for monetary policy — to bring it back into a more sustainable position”, he said.
But at present, the BoE does not know how many people in the UK are looking for work, because the Office for National Statistics is not publishing its usual estimates of unemployment, which are based on a faulty survey.
Business surveys had filled some gaps in the data but could not answer this question, Broadbent said.
In addition, official estimates of wage growth — while underpinned by a more reliable survey — had been volatile and at odds with other figures in recent months, he said.
He said this might be explained by unusual patterns in bonuses, and in the generosity of pay deals for existing employees versus new recruits.
But given the “slightly muddy” picture, the MPC would want to see “further evidence, across several indicators, before concluding things are on a clear downward trend”, he added.
Broadbent made it clear that this uncertainty could carry a real-world cost, drawing a comparison to the late 1980s boom when early estimates of gross domestic product growth underestimated the strength of the economy, and policymakers failed to head off a burst of inflation.
