BoE Chief Stresses Downside Inflation Risk

An uncertain U.K. outlook and the prospect of weaker-than-forecast inflation justify maintaining emergency policy settings, the Bank of England’s chief economist said on Thursday.

“The case for raising interest rates is still some way from being made,” Andy Haldane told the Trade Union Congress in London. “A rate rise would increase unnecessarily the chances of the economy falling below critical velocity, thereby extending the period inflation remains below target.”

In a speech that highlighted downside risks and increasing uncertainty, Haldane said there was more evidence of a “gentle slowing” of U.K. and world growth since the summer and that a further loss of momentum might push expansion below trend and add pressure on already-muted prices. Against that backdrop, he said policy makers should be ready to loosen or tighten depending on developments.

The BOE’s Monetary Policy Committee kept its key interest rate at a record-low 0.5 percent this month. Haldane said he has a “neutral stance on the future direction of monetary policy.”

“Now more than ever, policy needs to be poised to move off either foot depending on which way the data break,” he said. Haldane also said that the recent upturn in earnings has subsided and wage growth “appears to be fizzling.”

The MPC is debating when to begin removing the stimulus that was put in place to mitigate the impact of the financial crisis. Haldane said there are risks to the BOE’s central forecast for inflation. Those see consumer prices, which fell 0.1 percent in September, rising an annual 1.25 percent in the fourth quarter next year, before accelerating to 2.1 percent the same period of 2017, just above the bank’s 2 percent target.

The current projection assumes labor’s share of income reverts to its historical average, meaning that wages outpace productivity over the next few years, Haldane said. However, technological progress may have changed the structure of the labor market and there’s a risk of weaker wage growth and inflation that would be “materially lower” than forecast.

“That would put the balance of risks squarely towards a more protracted undershoot of the inflation target, even without any downdraught from external prices and demand,” Haldane said. Under those conditions, the rate of inflation would reach 1.6 percent at the two year horizon, he said.

A large portion of Haldane’s speech was taken up with technological advances and their impact on employment, including a warning that up to 15 million U.K. jobs could be at risk from automation in the coming decades. Most at risk are low-paid jobs, though Haldane noted:

“The smarter machines become, the greater the likelihood that the space remaining for uniquely-human skills could shrink further.”

Bloomberg

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