MNI INTERVIEW: BOE Needs To Hike In July - NIESR's Millard

The Bank of England should raise interest rates in July, rather than wait to see whether a weakening labour market prevents the spike in energy prices from feeding through into higher wage claims, the Deputy Director of the National Institute for Economic and Social Research Stephen Millard told MNI.

July’s meeting will be accompanied by forecasts and analysis in the BOE’s quarterly Monetary Policy Report which could be used to support a rise in Bank Rate, Millard noted in an interview.

"At NIESR, we think that one rise is enough," he said, "the trouble with second-round effects is by the time you see them, it's too late."

"Given that, I'd be inclined ... to get your first interest rate rise in early and then hope that that did the job." (See MNI INTERVIEW: BOE Must Hike In Coming Months-ExMPC's Sentance)

SCALE OF SLACK

The Bank held its policy rate at 3.75% on Thursday, as Monetary Policy Committee members discussed the potential for second-round effects from wage pressures in their individual paragraphs after the decision. 

"There's some slack opening up in the labour market that's likely to make it harder for workers to bargain for higher wages, and so is likely to keep second-round effects down," Millard said, agreeing with a comment by Deputy Governor Clare Lombardelli at the BOE’s post-decision press conference that it would be hard to discern the precise moment that any second-round effects take hold.

"We'll see unemployment durations lengthen. It's not that we're going to see ... suddenly a big increase in people moving from employment to unemployment,” he said.

It cannot yet be said whether a looser labour market will be sufficient to restrain the inflationary effects of wage growth, though some slack is clearly beginning to emerge, he said.

Still, there is "nowhere near as much [slack], I'd have thought, as the Bank seemed to imply exists at the minute, given what they showed in their scenarios for the output gaps," said Millard, who worked at the BOE until 2022 before joining NIESR. (See MNI INTERVIEW: Robust Policy Backs BOE Hike - Ex-MPC Saunders)

"We don't typically talk about output gaps, mainly because I just think you're in a mug's game trying to work out what the output gap is, but our view ... is you get an opening up of slack as the unemployment rate goes to 5.6% or so, relative to its natural rate of five."

LABOUR MARKET VARIATION

Job losses have been most pronounced in sectors such as hospitality with many minimum-wage workers, Millard noted, after the minimum wage was raised to GBP12.71 an hour.

"It'd be hard to imagine [these workers] moving into something else, so that this might just create a little bit more [labour market] mismatch that you wouldn't necessarily pick up with the vacancy-unemployment ratio," he said, referring to his favoured measure of labour market slack.

"You get an increase in unemployment or a reduction of vacancy-unemployment ratio. But for those industries where unemployment hasn't risen, then there's still going to be wage pressure there. So on average, you might get more wage pressure than you would do if the rise in unemployment was across the board.”

EARNINGS AND SCENARIOS

The latest wage settlement data came above any of the three scenarios presented in the Bank's April Monetary Policy Report, but Millard noted that such data can be volatile.

"Lots of settlements are made in January. Then you would know where we are with wage growth ... because the actual headline average earnings figure, I suspect, is going to be quite volatile over the year, within a three to 3.8 sort of a range," he said.

The key, he said, was to explain the broad assumptions behind each scenario and how much the Bank might react in such circumstances.