Thursday June 26, 11:33 AM
UK rate-setters said interest rate outlook will largely depend on wages UPDATE
(Updates to add further comments from Tim Besley)
LONDON (Thomson Financial) - Rate-setters at the Bank of England (BoE) said what happens with wages over the coming few months will be key to the outlook for UK interest rates.
In written testimony, deputy governor John Gieve, and external members Kate Barker and Tim Besley, all stressed developments in pay will be central to whether the upside risks to inflation, as outlined in the BoE's last Inflation Report, materialise.
'It is changes in pricing behaviour and in wage growth (until now relatively subdued) which will indicate whether the medium-term upside risk to inflation is materialising,' said Barker, who has voted with the majority on the nine-strong Monetary Policy Committee over the last year.
Conditions in financial markets, together with developments in property markets, employment and consumer spending, will be key to monitoring downside risks to growth that would tend to reduce future inflation, she added.
'I consider that the appropriate path of interest rates over the rest of this year remains highly uncertain,' said Barker.
Meanwhile, uber-hawk Tim Besley said it's the job of the MPC (A050540.KQ - news) over the coming months to convince wage and price setters 'through word and deed' that the increases in inflation foresee will only be temporary.
'Conveying this message in a credible way may reduce the need for more activist monetary policy in future and create a smoother adjustment path to the shock that we are now experiencing,' Besley said.
'I am open-minded about the path of Bank Rate that will be needed to maintain the inflation target in the medium-term and I will form a judgement depending on how the data evolves in the coming months,' he added.
Besley added that UK workers would have to absorb part of the soaring costs of commodities, meaning lower real wages.
'This is just a pure reality check on where we are and I don't think any way in which we set monetary policy can avoid these living standard adjustments,' he said.
King followed up though by saying that he envisaged more of a 'pause' rather than a fall in people's living standards.
Even though the annual CPI (NYSE: CPY - news) inflation rate is set to rise to above 4 percent in the coming months in the wake of sky-high energy, commodity and food costs, the markets think the chances that the MPC will lift Bank Rate from the current 5.00 percent are slim.
One reason that rates are expected to remain on hold is that the rise in inflation will cause a squeeze in spending that will slow the UK economy down and help bring inflation back to the 2 percent target.
'The prospect remains consistent with the sharp downturn in growth this year that we forecast in the May Inflation Report,' said John Gieve, who is to leave his post as deputy governor in the spring of 2009.
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