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BoE's Saunders Says Labor Cost Growth Unlikely To Fuel Inflation This Year

13.01.17 12:11

LONDON (dpa-AFX) - U.K. labor market is unlikely to witness any significant pay growth this year that would drive inflation higher and the economy may be able to tolerate sub-5 percent unemployment rate, Bank of England policymaker Michael Saunders said Friday.

"There is little sign of significantly higher pay growth for 2017," Saunders, who is an external member of the BoE Monetary Policy Committee, said in a speech in London.

He attributed the subdued trend in wage growth in part to structural changes such as greater labor market flexibility and insecurity, extra labor supply, increased under-employment, broader educational attainment, and changes to the tax and benefit system.

"The structural changes in the labor market are too recent to allow a definitive estimate of the new equilibrium jobless rate," Saunders said.

The BoE rate-setter pointed out that underlying pay growth will probably stay comfortably below the 4 percent pre-crisis norm during the next few years, unless the economy is strong enough to pull unemployment significantly lower and/or long-term inflation expectations rise markedly.

"Labor cost growth in 2017 seems unlikely to pose major upside risks to the inflation target," he said.

Saunders also said that setting the monetary policy should not seek to rule out sub-5 percent unemployment over time, "unless we see clear evidence of markedly higher labor cost growth and/or long-term inflation expectations, or the trade-off versus currency-driven inflation is much worse than expected".

Stressing that the policy target is for inflation and not unemployment, Saunders said the economy might be able to run with lower unemployment than previously, consistent with the inflation target.

However, a lower equilibrium jobless rate is no sole reason to loosen policy further, nor would it rule out tightening, he added.

"Sterling's recent depreciation will probably lift inflation above target this year, and economic growth recently has been stronger than expected," Saunders said.

"Rather than the rise in unemployment forecast in the November Inflation Report, it seems quite possible to me that the jobless rate will stay below 5 percent this year."

The policymaker concluded that labor market data will probably be key guides to watch in coming months.

Copyright RTT News/dpa-AFX


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