Pound surges as MPC’S arch dove points to rate hike

The Daily Telegraph - - Business - By Tim Wal­lace

RIS­ING wages and soar­ing em­ploy­ment could mean the Bank of Eng­land will soon have to con­sider rais­ing in­ter­est rates, an in­flu­en­tial pol­i­cy­maker has said.

The pound rose by an­other 1pc against the dol­lar to its high­est level in more than a year on the news. The speech comes the day af­ter Bank of Eng­land min­utes sug­gested the case for rate hikes was be­com­ing more com­pelling.

“If these data trends of re­duc­ing slack, ris­ing pay pres­sure, strength­en­ing house­hold spend­ing and ro­bust global growth con­tinue, the ap­pro­pri­ate time for a rise in Bank Rate might be as early as in the com­ing months,” Gert­jan Vlieghe said in a speech to the So­ci­ety of Busi­ness Econ­o­mists’ an­nual con­fer­ence.

Em­ploy­ment is grow­ing strongly, he said, while there are indi­ca­tions that pay is at last on the up.

“Wage growth is not as weak as it was ear­lier in the year: over the past five months, an­nu­alised growth in pri­vate sec­tor pay has av­er­aged just over 3pc. And some pay-re­lated sur­veys also sug­gest a mod­est rise in wage pres­sure in re­cent months,” he said.

“If these near-term labour mar­ket trends con­tinue, I would ex­pect this to lead to some­what more up­ward pres­sure on medium-term in­fla­tion.”

So far ris­ing in­fla­tion has been caused by the fall in ster­ling, a one-off change that should fade in the near fu­ture. But a more sus­tained rise in in­fla­tion could cause the Bank of Eng­land to act. Of­fi­cials on the Mone­tary Pol­icy Com­mit­tee, led by Mark Car­ney, have so far kept rates on hold at 0.25pc to sup­port the econ­omy.

But ris­ing in­fla­tion and sus­tained jobs growth means the MPC took a sur­prise turn on Thurs­day in hint­ing that rates could go up as soon as this year.

That state­ment took mar­kets un­awares and drove the pound up by more than 1pc against the dol­lar. Now the lat­est speech by Mr Vlieghe has pushed ster­ling up by an­other 1pc to $1.3525, the high­est level since the EU ref­er­en­dum last year.

The state­ment is par­tic­u­larly sig­nif­i­cant be­cause Mr Vlieghe had pre­vi­ously been con­sid­ered to be a par­tic­u­larly dovish mem­ber of the Mone­tary Pol­icy Com­mit­tee, favour­ing a pol­icy of low rates for a longer pe­riod of time.

“Un­til re­cently, I thought the ap­pro­pri­ate re­sponse of mone­tary pol­icy was to be pa­tient, given mod­est growth and sub­dued un­der­ly­ing in­fla­tion­ary pres­sure,” he said.

“But the evo­lu­tion of the data is in­creas­ingly sug­gest­ing that we are ap­proach­ing the mo­ment when Bank Rate may need to rise.”

In par­tic­u­lar be be­lieves the rise in house­hold bor­row­ing is a sign that rates may have to rise.

Mr Vlieghe told the au­di­ence of econ­o­mists that the fall in bor­row­ing af­ter the fi­nan­cial cri­sis ne­ces­si­tated a fall in rates, while the in­crease in bor­row­ing may now in­di­cate that they should rise.

“I note that the delever­ag­ing trend since 2010 seems to have come to an end, or at least a pause. That may be telling us that equi­lib­rium real [in­ter­est] rates are now ris­ing slightly, although other driv­ers of low real rates do not show any signs of turn­ing yet,” he said.

How­ever, Mr Vlieghe added that there are plenty of caveats to rais­ing rates.

“There re­mains a risk that, at some stage, the un­cer­tainty sur­round­ing the Brexit process has a larger im­pact on the econ­omy than we have seen so far. If that hap­pens, mone­tary pol­icy would re­spond ap­pro­pri­ately,” he said.

“But for now, it seems the net ef­fect of the many un­der­ly­ing forces act­ing on the UK econ­omy is that slack is con­tin­u­ally be­ing eroded and wage pres­sure is gen­tly build­ing.”

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