Further interest rate cuts will not happen unless wage growth slows materially, a Bank of England rate-setter has warned.
Clare Lombardelli, the Bank’s deputy governor for monetary policy, said that while inflation has been falling, earnings are still rising too fast to be consistent with bringing it back to its two per cent target sustainably.
Speaking at the Bank’s annual Watchers’ Conference in London on Monday, Lombardelli said she had “balanced between holding and cutting rates” at the May meeting.
Ultimately she opted to support a 0.25 percentage point cut to 4.25 per cent – the lowest in two years – citing “further gradual progress on disinflation”.
According to the latest data from the Office for National Statistics (ONS), average weekly earnings excluding bonuses rose by 5.9 per cent in the three months to February.
While that marks a slight slowdown from previous months, it remains well above the Bank’s estimated inflation-compatible range of around 3 to 3.5 per cent.
When wages rise, firms have higher labour costs, which they could then pass on to consumers in the form of higher prices – which can push up inflation.
Lombardelli warned: “Wage growth is still too high to be consistent with inflation at target. Caution remains appropriate. I’ll be more comfortable when I see material deceleration in the data over a longer period.”
Markets currently expect three more interest rate cuts this year, but Ms Lombardelli stressed that any further easing would depend on how domestic inflation pressures evolve – particularly pay growth and service-sector prices.
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The former senior Treasury official said: “Monetary policy is still restrictive, and the current stance reflects a balance between the need to continue to squeeze out underlying inflationary pressure, and managing the risks of lower demand in the economy.”
There are, however, signs that wage pressures are starting to ease. Bank of England staff estimate that underlying pay growth – a smoother, adjusted measure of wage trends – has fallen to about 5.25 per cent, and forward-looking indicators suggest a further slowdown ahead.
The regular agents’ summary of business conditions, published by the Bank, had previously forecast pay would be 4 per cent higher by the end of the year, but the latest survey suggests pay is coming in lower at 3.7 per cent.
Lombardelli also said that global economic uncertainty, particularly around US trade policy, could have disinflationary effects for the UK in the short term.
“Higher tariffs and more uncertain US policies will likely reduce growth and inflation over the policy-relevant horizon because of reduced demand and trade diversion from reduced exports by the rest of the world to the US.
“The exchange rate movements we have seen further support lower imported inflation to the UK, although exchange rates can shift in response to trade policy news and the evolution of global risk sentiment.”
However, she added that any long-term fragmentation of global trade, such as the decoupling of major economies, could push inflation higher over time.
Decoupling is where nations reduce their economic and technological dependence on one another, something that could happen should tensions between the US and China, for example, continue.
While headline inflation fell to 2.6 per cent in March, from 2.8 per cent in February, it is expected to rise again in April due to higher energy bills, before easing back later this year.
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