The BoE hosted the roundtable with the Centre for Economic Policy Research (CEPR), where a range of economists from the private sector, academia, public institutions and industry associations discussed the ‘natural’ level at which policy rates should rest.
There was consensus that market rate paths imply a gradual policy tightening in coming years, with participants agreeing that rates would need to rise to combat inflationary pressures.
However, owing to decades of economic change, the participants also agreed that the natural rate of interest – the sweet spot of stable inflation and sustainable growth, has “probably fallen” and would “probably settle below historical average levels”.
One or two rises per year
Some participants referred to this as the ‘new normal’ for monetary policy.
The quarterly bulletin was published as the Monetary Policy Committee (MPC) voted to maintain the base rate at 0.5%, but gave strong hints that hikes of a gradual pace and of a limited extent will be due in the coming months.
In a speech to the Confederation of British Industry (CBI), Gertjan Vlieghe of the MPC argued that one or two quarter point increases in the Bank Rate per year over the forecast period was “consistent” with economic outlook – with a tight labour market stoking inflationary pressures, strong global growth, and diminishing downside risks to medium-term inflation.
Wage growth
Indeed, the BoE roundtable expected pay growth to be “slightly stronger” in 2018 on average than in 2017.
However, participants expected that any pay jump this year to be modest by historical standards, in part owing to tepid productivity growth.
Participants also suggested the upward pressures on pay from a tightening labour market in the past have been dampened by workers’ reduced wage expectations following the crash, and the fall in bargaining power associated with the decline in unionisation since the 1970s.
