According to a senior official, the Bank of England will have to wait until it is more certain that the UK labour market has stabilized before it can confidently conclude that inflation is falling and lower interest rates.
Ben Broadbent said that the inconsistent and volatile data made it difficult to determine how quickly wages are growing, as well as why. These questions were crucial for the Monetary Policy Committee of the Bank of England to assess inflationary pressures.
He told a London Business School audience that this kind of uncertainty was “very expensive” to the economy because it affected interest rate setting.
“One implication” . . Broadbent said that the policy reaction to any shock is likely to take a little longer than it would in a world with perfect and complete knowledge.
His comments highlight the frustration felt by policymakers due to data problems, which have prevented them from answering key questions regarding the driving forces of the UK economy.
The BoE last week held interest rates at the highest in 15 years, 5.25 percent. It was more hawkish on the outlook of the cost of borrowing compared to the US Federal Reserve and European Central Bank.
The financial markets have already priced in a cut of about 1.15 percentage point by the BoE to December 2012.
The BoE’s most important question is whether the rapid growth in wages will continue to drive up prices for labour-intensive services even though global energy and goods inflation continues to decline.
Broadbent stated that policymakers need to determine whether wage increases are mainly caused by rising prices or by a tight job market with a shortage of workers.
Broadbent stated that if the first was true, then wage growth would soon slow down. He said that if the second was true, then the UK would require “a longer period below-trend growth – possibly with corresponding implications for monetary policies – to bring it back in a more sustainble position”.
The BoE doesn’t know the number of people looking for a job in the UK because the Office for National Statistics does not publish its usual estimates based on an incorrect survey.
Broadbent stated that while business surveys filled in some data gaps, they could not answer the question.
He said that official estimates of wage increases, while backed by a more reliable study, were volatile and inconsistent with other figures over the past few months.
He suggested that this could be due to unusual patterns of bonuses and the generous pay packages offered for new hires versus existing employees.
He added that, given the “slightly murky” picture, MPC would need to see “further proof, across multiple indicators, before concluding the things are on a clearly downward trend”.
Broadbent stated that uncertainty can have a real cost. He compared it to the 1980s boom, when the early estimates of GDP growth understated the strength and the economy. Policymakers also failed to stop a surge of inflation.