MANCHESTER, England (Reuters) – Bank of England Deputy Governor Minouche Shafik said on Friday she saw “encouraging” signs from wage and labor market data, and that the causes of Britain’s plunging inflation rate were not expected to last long.
Shafik said the risk that the effects of the financial crisis might prove to be more permanent than thought was the “primary motivation” for her voting to keep interest rates on hold at a record low of 0.5 percent in the 10 months since she joined the Monetary Policy Committee.
“But it seems to me most likely that first, the factors currently pulling down on headline inflation will not do so
permanently,” said Shafik in a speech to the Association of Corporate Treasurers in Manchester.
“Second, the headwinds currently affecting demand in the economy will continue to gradually ease over the coming years… and third, a return to productivity growth will facilitate potential output growth over the long term.”
Britain’s inflation rate turned marginally negative at minus 0.1 percent in the 12 months to April, the first occurrence of deflation since 1960. The BoE and economists expect inflation to pick up soon and financial markets expect a first rate hike in about a year’s time.
Earnings, as measured by the Office for National Statistics, lagged behind inflation for much of the period since the financial crisis but picked up recently and rose 1.9 percent in annual terms in the first quarter of this year.
Explaining why British wage growth has been so poor since the financial crisis, Shafik “put weight” on a lack of confidence among workers to demand wage increases which would have been the norm in the years prior to the crisis.
(Reporting by Andy Bruce; editing by William Schomberg)