Weak wage growth gives Bank of England time before raising rates says MPC dove

Jasper Jolly
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Deputy governor Jon Cunliffe voted against raising interest rates at the last MPC meeting (Source: Getty)

The Bank of England still has time before it raises interest rates despite an increasingly difficult trade-off between rising inflation and weak wage growth, according to one of the remaining doves on the rate-setting monetary policy committee.

Jon Cunliffe, the Bank deputy governor in charge of financial stability, said the lack of domestically generated inflationary pressure “gives us a bit of time to see how this evolves” before raising rates.

However, in an acknowledgement of the divisions between the current eight members of the MPC, Cunliffe said the overshoot of inflation above the Bank’s two per cent target was causing concern, in an interview with the BBC in Durham.

“We know when we get inflation driven by depreciation that stays in the system for some time,” he said. “That’s not a comfortable place for any member of the MPC to be when inflation is above target.”

Cunliffe was one of five members on the MPC to vote for bank rate, the Bank’s main interest rate, to stay at 0.25 per cent. However, three members shocked markets by voting for a hike a fortnight ago.

Since then Cunliffe’s MPC colleague, the Bank’s chief economist Andy Haldane, has thrown his hat into the ring, saying a rate rise before the end of the year would be appropriate.

That could theoretically leave a tie on the MPC, although the most prominent hawk, Kristin Forbes, leaves the Bank on Friday to be replaced by Silvana Tenreyro. While Tenreyro is something of an unknown quantity, her previous monetary policy experience at the Bank of Mauritius has shown her willing to cut rates to support growth.

Cunliffe also warned the financial policy committee (FPC), the MPC’s sister body in charge of financial stability, was seeing worrying signs around some forms of consumer lending.

The FPC warned yesterday of “pockets of risk” building in the economy, particularly around declining underwriting standards, car finance, and commercial property.

Cunliffe said some lenders risked being “lulled into a false sense of security” by the current benign environment and low default rates, with offers from some credit card lenders reaching the bounds of sustainability.

Pointing to “extreme” examples of four-year interest-free teaser periods on credit card debt, Cunliffe said: “You do look at that and think maybe the competition in this market has gone a bit far.”

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