The dove's case: Bank of England deputy governor says domestic inflation may undershoot

 
Jasper Jolly
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BRITAIN-ECONOMY
Monetary policy is in the middle of a "heightened period of uncertainty", according to Sir Jon Cunliffe (Source: Getty)

Inflation generated in the British economy risks undershooting the Bank of England’s forecasts, according to one of its influential deputy governors as he laid out his case for voting against raising interest rates.

Sir Jon Cunliffe, a member of the rate-setting monetary policy committee (MPC), said: “There is in my view a not immaterial risk that the trade-off is not as it currently appears and that domestic inflation pressure will undershoot the committee’s collective expectation.”

The MPC raised interest rates for the first time in a decade at the start of the month in an attempt to battle high inflation and to account for limited spare capacity in the economy.

Read more: The BoE's top economist says inflation will stay above target for "years"

Cunliffe and fellow deputy governor Sir Dave Ramsden voted against the interest rate rise, while the other seven members voted in favour, led by governor Mark Carney.

In a speech to the Oxford Economics Society delivered this evening, Cunliffe said he agrees with the MPC’s broad conclusion that Britain’s economic growth potential is lower than before the global financial crisis, and that there is therefore less “slack” in the economy.

However, he said the MPC should have waited longer before tightening the supply of money to the economy.

He said: “In my view the low level of domestic pressure on inflation now, the absence of second round effects from the depreciation of sterling, and inflation expectations around their historical averages, make it possible to wait before tightening policy until there is clear evidence that pay growth is responding to the level of unemployment in line with our forecast.”

Read more: Wages to gain momentum in 2018 says Bank of England survey

Office for National Statistics figures today revealed inflation remained at three per cent in the year to October, below the Bank’s expectations but still well above its two per cent target.

Yet despite the pick-up in the headline measure, the lack of domestic inflationary pressure at a time of the lowest unemployment since 1975 has puzzled the Bank’s economists.

Cunliffe suggested multiple reasons that the relationship, known as the Phillips Curve by economists, may be failing to correctly model the economy. Those included mismeasurement of the labour market, a weaker correlation between unemployment and wage growth, structural shifts in the labour market or, indeed, the failure of the model altogether.

Cunliffe added: “We are almost certainly going through a period of heightened change at present. The current level of uncertainty around the key assumptions on which we model and understand the economy is, in my view, different in kind to uncertainties about the data or signals we receive which are always mixed.”

Read more: Bank of England raises interest rates for the first time in a decade

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