LONDON (Reuters) – British pay growth is struggling to exceed 3 percent and policymakers should not over-react to a recent improvement, Bank of England Deputy Governor Jon Cunliffe said on Wednesday, striking a more cautious tone than some of fellow policymakers.
The BoE has said it expects to raise interest rates gradually as wage growth picks up. Last week its chief economist Andy Haldane said he saw a “new dawn” for pay.
But Cunliffe said he was not yet convinced that pay growth would exceed the 3 percent level the BoE predicted, adding that there had been many false dawns on pay in the past.
Average earnings in Britain have fallen in inflation-adjusted terms over the decade since the financial crisis.
Hopes that the worst of the squeeze was over were boosted on Tuesday when official data showed annual wage growth, excluding volatile bonuses, picked up to its highest level since 2009 at 3.1 percent.
Cunliffe, who voted against the BoE’s first post-crisis rate rise last November, said domestic inflation pressures, such as those created by rising wages, were still not strong enough to stop inflation from undershooting its 2 percent target.
“Pay growth has established itself in the 2.5-3 percent range. But the latest readings do not signal strongly that pay growth will make the next step to establish itself firmly in 3 percent territory in line with the May forecast,” he wrote in evidence to a parliamentary committee.
Cunliffe backed the BoE’s most recent rate rise in August, which took interest rates to a nine-year high of 0.75 percent. But on Wednesday he reiterated his view that policymakers should act cautiously.
The amount of spare capacity in Britain’s labour market was particularly uncertain, he added.
“We are still learning about the relationships between key economic variables in the post-crisis economy…. This for me still implies an approach with a little more resistance in our reaction to developments,” he said.
BoE Governor Mark Carney said after August’s rate rise that market expectations of roughly one increase a year for the next three years was a good rule of thumb.
Some economists think rates could rise again as soon as February, assuming Prime Minister Theresa May reaches a Brexit transition deal by then and the pick-up in wages continues.
Cunliffe also said he saw no clear case for offering more specific guidance on interest rates — as given by the U.S. Federal Reserve and Sweden’s Riksbank — as it risked being misinterpreted by the public as an unconditional commitment.