Dame Nemat Shafik said in a speech to the Institute of Directors that the interest rate path implied by markets, which the Bank appeared to endorse, was “not necessarily a true reflection of what participants expect is going to happen”.
The Times are reporting that she said it was “interesting to note that surveys of economic forecasters — a more direct measure of the expected future path of interest rates — show expectations for a faster pace of increases”.
Her comments suggested that she was more sympathetic to economists’ predictions than the market path for rates that the Bank uses to build its growth and inflation forecasts.
Markets were signalling last month that rates would not rise from their record low of 0.5 per cent until March 2017 and that there would be only two more quarter-point increases by the end of 2018. Economists expect the first tightening to come next year.
Dame Nemat was careful to say that she would “proceed with caution” and insisted that she would not vote for an increase until there was evidence of wage growth.
“I will wait until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target before voting for an increase in bank rate,” she said.“But once I am convinced, absent further shocks, I can see bank rate rising more quickly than the path implied by the market curve at the time of the last Inflation Report.”
Speaking before the US Federal Reserve’s anticipated decision to raise rates tomorrow, she added that she was watching America with interest.
“Obviously, we’ll be watching the Fed’s decision-making on Wednesday very, very closely, and be learning lessons from that episode. But we’ll take our own decisions, depending on our own circumstances,” Dame Nemat said.
“There are some reasons why they’re [likely] to act before we do. Their transmission mechanism is slower than ours because of the prevalence of fixed-rate long-term mortgages in the US system.”
Dame Nemat said that markets were effectively over-insuring against the risk of an economic downturn, which meant that the “yield curve” implied a very slow increase in rates. Although she said that economists were forecasting a faster trajectory, she reiterated that any rises would be “gradual and limited”.
She said that she would not be voting for an increase until there was evidence that wages were growing about “2 to 3 percentage points more quickly than productivity growth”.
Monthly pay growth has slowed sharply since July, from 3.6 per cent to 2 per cent, according to the Office for National Statistics. “Wage growth seems to have levelled off in the most recent data,” Dame Nemat said.
She said that there were four possible reasons for the flattening in pay: a drop in hours worked, a skew towards jobs with lower wages, reduced salary settlements becaue of persistently low inflation and the lingering effects of the recession.
