Bank of England’s latest arrival strikes hawkish tone on inflation

By DOMINIC JEFF
Published on 19/01/2013 00:00

THE Bank of England’s newest policymaker has warned that inflationary pressures are building up in the economy as pay rises that have been postponed in the lean years return with a vengeance.

Former CBI chief economic adviser Ian McCafferty, who joined the Bank of England’s monetary policy committee (MPC) in September, predicts that as the economy recovers companies will feel obliged to “reward” staff who have undergone a squeeze on living standards with “generous” pay rises. In a speech yesterday, he said the recent years of recession and turmoil had led to changes in the way companies manage their labour force, with many firms opting for pay freezes while keeping valued workers on in order to maintain their productive capacity.

Worries over inflation, which is already above the bank’s core target level, are often cited as a reason for the MPC to hold back from stimulating the economy through its programme of quantitative easing (QE).

McCafferty, seen as less favourable to QE than many on the MPC, said the central bank should explore policy alternatives to quantitative easing if needed, as its effectiveness was unclear under the current conditions.

However, he hinted that it is a matter of when, not if, the bank launches another QE spending spree.

“QE still works, but it is important to consider carefully the timing of further flows and to be mindful of when any further policy stimulus, which is not costless, would be likely to have the greatest impact,” he said.