BoE's McCafferty says MPC should not fear pound strength
The Monetary Policy Committee’s “clear cut” 8 July decision not to raise Bank Rate was adopted just when the uncertainty around events in Greece was at its height, but since then confidence in the euro area had improved, Ian Mc Cafferty told Market News International in an exclusive interview.
The rate-setter, a well-known hawk on the MPC, placed weight on the strength seen in total UK earnings while emphasising the central bank should not fear an appreciation in sterling in reaction to a rate hike.
As regards domestic cost pressures arising from higher wages, McCafferty told MNI one should focus on total earnings, including bonuses, that is, as at least outside the financial sector, rising bonus payments can reflect labour market tightening.
Furthermore, if one looks at only private sector earnings those increased in the three months through May by 3.8% on a year ago.
"I do think that in terms of underlying CPI pressures, private sector AWE is a good indicator of forthcoming inflation pressures. A good deal of government output is not priced and does not then automatically appear in the CPI," McCafferty said.
“In the halcyon pre-crisis days, average earnings growth of 4% nominal, reflecting 2% productivity growth and a 2% inflation target, was seen as normal,” the central banker added.
So for him, if the MPC's objective is for gradual rate hikes then it can't keep delaying the first move.
Nevertheless, after commenting on the chances of another dramatic drop in the price of oil he concluded by asserting that: "It is always possible that both positive and negative shocks come out of left field that we hadn't fully expected [...] Which is why anybody who is absolutely certain about when interest rates are going to start that process of normalisation is more certain about it than I am.”