Bank of England’s Dhingra Expects Weaker Wage Growth and Lower Inflation
Labour Market Data Indicates Softening Economy, says Bank of England Policymaker
Recent labour market data shows signs of a softening economy, which is expected to result in slower wage growth and reduced inflation pressure, according to Bank of England policymaker Swati Dhingra. Speaking at an event hosted by Britain’s Royal Economic Society, Dhingra stated that with the labour market loosening, it is challenging to envision where further momentum in wage growth will come from. She also added that there should be some alleviation of domestic inflationary pressures.
Job Vacancies Decrease, Pay Growth Slows
Labour market data released earlier this week revealed that the number of job vacancies dropped to a two-year low, while growth in regular pay slowed for the first time since January. The three months leading up to the end of July saw a record high of 7.9% growth in regular pay, but this has now tapered off. Dhingra, echoing Chief Economist Huw Pill’s sentiments, stated that other measures and forward-looking indicators imply wage growth in the range of 5% to 6%, rather than the headline rate.
Pre-Pandemic Wage Growth and Interest Rates
Before the COVID-19 pandemic, when inflation hovered around its 2% target, wage growth typically ranged from 3% to 4%. Dhingra, who has consistently voted against rate rises this year, reiterated her belief that a more moderate path of interest rates over a longer period would have been preferable. She argued that such an approach would have allowed for a more balanced transmission to firms and households, avoiding the sharp peaks and troughs associated with raising interest rates to high levels. The Bank of England recently decided to keep rates on hold for the first time since December 2021, marking a shift in its rate-raising cycle.
In conclusion, the recent labour market data suggests a weakening economy, which is likely to lead to slower wage growth and reduced inflation pressure. Dhingra’s insights shed light on the challenges ahead and the need for a balanced approach to interest rates. As the situation continues to evolve, policymakers will need to carefully navigate these economic dynamics to support sustainable growth.
