November 15, 2017 / 1:03 PM / a year ago

Bank of England's Broadbent says low unemployment to boost wages

LONDON (Reuters) - The Bank of England needs to stick with its assumption that lower unemployment will generate faster inflation, despite uncertainty about both this and the impact of Brexit on the economy, Deputy Governor Ben Broadbent said on Wednesday.

Deputy Governor of the Bank of England Ben Broadbent speaks at a Reuters Newsmaker event at Canary Wharf in London, Britain, November 18, 2015. REUTERS/Neil Hall/File Photo

Broadbent, part of the 7-2 majority on the BoE’s Monetary Policy Committee who backed the central bank’s first interest rate rise in a decade earlier this month, said above-target inflation and dwindling spare capacity justified the move.

Broadbent made his comments in a speech at the London School of Economics, hours after official data showed the number of Britons in work recorded its biggest fall in two years. His BoE colleague Jon Cunliffe expressed doubts about wage growth late on Tuesday.

“Several commentators have questioned the MPC’s central prediction that wage growth will rise next year. Some have gone further and pronounced the death of the Phillips curve. There are always risks to any forecast. But the latter claim, at least, is premature,” Broadbent said.

The Phillips curve shows the historic relationship between falling unemployment and faster wage growth.

British inflation hit a five-year high of 3.0 percent in September. The Bank forecasts it will slowly fall, but Broadbent said the balance of risks around price pressures — and future interest rates — was uncertain.

For now, Broadbent said, the BoE needed to take signs of ongoing inflation pressure seriously.

“What’s been in front of us for several months is an economy with above-target inflation and dwindling spare capacity. That’s why I think it was the right thing to remove a degree of monetary accommodation,” he said.

Britain’s looming departure from the European Union in March 2019 did not imply rates were more likely to fall than to rise.

“There’s no inevitability about the balance of these effects,” he said. “Some of those effects could come through faster than people often assume.”

Reporting by David Milliken; Editing by Catherine Evans

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