BOE’s Dhingra Expects Further Easing in Wage Pressures

Bank of England rate-setter Swati Dhingra said she expects a “letting up” of wage pressures that will lead to a further cooling in inflation.

(Bloomberg) — Bank of England rate-setter Swati Dhingra said she expects a “letting up” of wage pressures that will lead to a further cooling in inflation.

“It’s very hard to imagine where further momentum in wage growth is going to come from,” she said Tuesday on a panel at the Royal Economic Society Summit.

“We should see some relenting of domestic inflationary pressures,” said Dhingra, who has consistently called for an end to rate rises. She said that wage trends, falling producer prices and “subdued profit growth” will cause inflation to cool.

The remarks suggest Dhingra will maintain her staunchly dovish stance at the next BOE meeting after policymakers last month voted to halt a hiking cycle that has taken interest rates from 0.1% to 5.25% in less than two years. Her comments came after an easing in official wage growth figures on Tuesday that will strengthen the case for leaving rates on hold at the Nov. 2 meeting. 

Dhingra said the official wage figures are giving a “more inflated picture” of pay growth compared to other indicators. 

“The forward looking measures seem to be suggesting somewhere in the order of 5% to 6% wage growth, but of course, there’s always going to be some level of uncertainty about whether those forward looking measures are in fact going to pan out in the future,” she said. 

The strength of wage growth represented an inevitable “catch-up” response to the cost-of-living shock and will be hard to sustain, with most of the effect of past rate increases yet to feed through to the economy, Dhingra said. She added that some inflation indicators have been more dependable than labor market data, which fail to capture turning points. 

Dhingra’s views clash with those of hawks at the BOE, including fellow rate-setter Catherine Mann, who has continued to argue for more tightening to stop high inflation expectations taking root. 

Mann has argued that overtightening would be easier to rectify than doing too little, while Chief Economist Huw Pill said on Monday that it was too early to declare victory in the fight against inflation. The nine-member Monetary Policy Committee split 5-4 in favor of keeping rates unchanged last month.

Overtightening Risk

The BOE is expected to hold rates again in November, money market pricing shows, though traders still favor one more hike by early next year.

Dhingra warned that there are some early signs of overtightening emerging, such as rising youth unemployment. 

“My worry is that if we do that to handle a supply shock, we obviously risk damaging supply capacity and that could probably be more stagflationary,” she said. 

On quantitative easing, Dhingra said she was skeptical that the BOE’s vast bond purchases during the pandemic had driven inflation after criticism from some Conservative MPs and ex-BOE Governor Mervyn King. However, she was more supportive of claims that QE inflated asset prices and may have contributed to inequality.

“I think on asset prices, of course if that’s the channel through which QE operates, it has had an impact on asset prices and probably inflated them over and above what we as a society might want them to be,” she said.

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