LONDON — Bank of England policymaker Kristin Forbes believes the wage growth slowdown that many are flagging as a signal of a coming economic shock in the UK is merely a temporary Brexit related blip.
Forbes was the only member of the bank's Monetary Policy Committee to vote for an interest rate hike in March this week, reaffirming her stance as probably the most hawkish policymaker at Britain's central bank.
Forbes supported a return to the rate of 0.5%, which was in place for seven years before being cut last August as a means to protect the UK from a Brexit-induced economic shock.
Writing in the Daily Telegraph on Friday, Forbes justified her contrarian view by arguing that stuttering wage growth — which was cited by other MPC members as a key reason for keeping rates on hold — should be looked through, with more focus placed on the rising inflation currently hitting the UK.
Inflation is surging thanks largely to the slump in the pound since the Brexit vote. Inflation hit 1.8% last month. In normal circumstances, inflation passing above 2% — which it is expected to do in coming months — would likely see the bank raise interest rates to offset this impact.
However, while inflation is on the rise, real wage growth is stagnating and retail sales are beginning to cool, suggesting that the negative impacts of Brexit on the UK's economy are starting to bite. Forbes disagrees, writing:
"Although wage growth has been disappointing, this likely reflects temporary caution around Brexit. And there is even more uncertainty than usual about where wages are heading. The standard deviation of different indicators of wage growth has increased to highs not seen since the crisis."
On the other side of the bank's inflation/wage growth coin, Forbes argues that, globally, inflation pressures are picking up, which coupled with the inflationary effects of the falling pound could combine to push inflation beyond an acceptable level. Here is Forbes once again:
"The upside risks to inflation have also increased. Global economic activity and inflation are picking up. UK price pressures at the early stages of the supply chain have already accelerated sharply. Many indices of input and output prices have reached — and in many cases exceeded — the highs seen around 2010-11 when inflation peaked at 4.7%."
"The bottom line," Forbes adds, is that "the inflation side of the trade-off has worsened."
At the same time, she argues that the recent slowdown in consumer spending should not be overestimated:
"This softening [of consumer spending] however, should only be moderate, due to support from resilient consumer confidence, solid house prices, low unemployment, and easy access to cheap credit. Other forms of consumer spending, such as car sales, have also been firmer. There are risks consumers could pull back more sharply — but these are still just risks."
