The beginning of the tightening cycle in the UK should come once the wage growth and the unit labor costs begin to increase to such a level that their strength is enough to offset cheap oil, and is consistent with the CPI inflation returning to the 2% target in medium term, Forbes will argue on Tuesday.
“Once this upward momentum in wages and unit costs builds, as I expect it will, then it will be time for the UK to follow the example of its fellow ‘city’ and begin the slow and gradual process of tightening monetary policy. The relatively smooth experience of ‘lift-off’ in the US suggests that, at least in this ‘Tale of Two Cities’, there will not be a revolution,” Kristin Forbes will say during her speech to the Henry Jackson Society in Parliament on Tuesday.
Forbes said that even though the labor market has been tightening sharply in recent years, wages continue to run below their pre-crisis average.
“The UK labor market still has some slack and firms are not under so much pressure to find and keep workers that they need to pay more. With slow wage growth, inflation currently at 0.2%, and downward price pressure from cheaper energy and sterling’s past appreciation, there appears to be little risk of inflation suddenly spiking to well above our 2% target in a way that would require increasing interest rates soon,” Forbes will say.