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 in a bid to support the economy.
But rising inflation and sustained jobs growth means the MPC took a surprise turn yesterday 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 MPC, headed by Mark Carney, wants markets and households to take seriously the chance that interest rates could rise sooner than had previously been expectedCredit: Chris J Ratcliffe/PA
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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 indicates 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.
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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.”