LONDON (Reuters) - The Bank of England is turning its focus back to the more conventional business of bringing down inflation as Britain’s economy showed it was getting over the damage wrought by the 2007-09 financial crisis, Governor Mark Carney said on Tuesday.
Little more than a week before the BoE gives its latest assessment of the economy, Carney said wages were gradually rising, something the central bank wants to see as it considers when to follow up on November’s first rate hike in a decade.
“The important thing with policy now ... is that as ... slack in the economy has been taken out, we move into a more conventional area for monetary policy, where the focus is increasingly on returning inflation sustainably to target over an appropriate horizon,” Carney told members of Britain’s House of Lords (upper house of parliament).
“The labour market has continued to tighten. We see it in a gradual firming of wages.”
Pay should soon start growing faster than inflation, Carney added. “The firming of the labour market and the pick-up in wages over the course of the next few years appears to be on track, so there is a prospect of a return of real income growth later this year.”
The BoE raised interest rates for the first time since 2007 in November and said it was likely to raise them again over the next three years as it sought to bring inflation down towards its 2 percent target.
Inflation in November hit a nearly six-year high of 3.1 percent, pushed up by the hit to the value of sterling caused by the 2016 Brexit vote. It fell back to 3.0 percent in December but remained faster than pay growth of about 2.5 percent.
Data published last week showed Britain’s economy performed better than the BoE expected at the end of last year, although it still lagged behind stronger growth in many other rich countries due in large part to the impact of the Brexit vote.
Carney said Britain’s chronically weak economic productivity - which weighs on living standards and pushes up inflation - seemed to be a more persistent problem than he had thought it would be several years ago.
Productivity growth was likely to pick up to 1.0-1.5 percent a year over the next three years, but did not look on track to return to the 2 percent rate seen before the financial crisis.
Economists mostly expect the next BoE rate hike in the second half of 2018 but some think it could move as soon as May. The publication of the BoE’s latest economic forecasts on Feb. 8 could help give investors a clearer sense of the its next steps.
Reporting by David Milliken and Alistair Smout; Writing by William Schomberg; editing by Mark Heinrich