Britain’s “robust” recovery has not caused price pressures to build in the economy, according to the Bank of England’s deputy governor, who suggested that disinflationary forces from abroad meant there was no immediate need to raise interest rates, reports The Telegraph.
Sir Jon Cunliffe said the “sharpest drop in unemployment for 40 years”, record high consumer confidence and the “pretty strong” outlook for UK growth were being overshadowed by powerful disinflationary forces from countries such as China, which were keeping inflation far from the Bank’s 2 per cent target.
Sir Jon, who is in charge of financial stability and also sits on the Bank’s Monetary Policy Committee (MPC), said the tighter labour market and stronger pay growth had not generated big inflationary pressures, in a departure from pre-crisis trends.
“What we’re not seeing is price pressure building up in the chain. With that drop in unemployment pre-crisis you would have expected to see pressure on pay much earlier. It didn’t come,” he told the Newcastle Chronicle. We’ve got a lot of disinflationary pressure coming from abroad, which is holding inflation around zero.”
Despite concerns about Chinese growth, which led to a global stock market sell-off and pushed commodity prices lower, Sir Jon said the next move in interest rates was still likely to be up.
“We’ve got to look 18-24 months ahead but if you put that economic picture together it seems that the next move on monetary policy would be up and it also looks as if it will be a limited and gradual rise when it happens.”
Sir Jon said “good news” on pay and productivity suggested that the UK would enjoy stable growth over the next two years.
However, he said strong domestic growth was likely to be offset by externally generated disinflation from countries including China, where growth is expected to be weaker in the coming months.
Sir Jon said: “We’ve had good news on pay, good news on productivity – which we’ve been waiting for for a long time – and we avoided the catastrophe on Greece that was a substantial possibility before the summer.
“On the other hand, in China the possibility of slower economic growth than we’d been forecasting is greater now after what we saw in the summer. What’s happened in the Chinese stock markets is a rather different thing but there is the prospect of slower growth in China and the emerging markets look weaker.”
While Sir Jon’s comments suggest he remains cautious about raising interest rates, they contrast with those made by Andy Haldane, the Bank’s chief economist, who said last week that the Bank of England may need to push rates into negative territory to fight off the next recession.
