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The Bank of England will move quickly to raise interest rates if pay rises take off but productivity does not, its new deputy governor warned.
Giving her first interview since taking charge of markets and banking at Threadneedle Street, Minouche Shafik said the Bank would act if inflation becomes a threat.
“If wage increases are expected but productivity is performing well we can wait for longer; if those wage increases are not accompanied by productivity increases then I think we will have to move more quickly on rates because inflationary pressures will build up. I think that’s the key choice that we face,” she told The Yorkshire Post.
Despite economic growth in the UK, wage growth and productivity have remained surprisingly weak.
The Bank’s rate-setting monetary policy committee (MPC), of which Shafik is a member, has stressed that rate increases will be “gradual and limited” if possible. Rates have been on hold at 0.5% since March 2009.
Wage rises have lagged behind inflation for the majority of the period since 2008, meaning a prolonged period of falling real pay for UK workers.
Shafik said: “We don’t want to take risks with this recovery. It’s been a long recession and I think that’s going to be the biggest challenge going forward.
“The recovery is encouraging. The real question is how can we make this recovery sustainable.”
She said the eurozone remained “a significant risk” to the UK economy, highlighting persistently low inflation in the region which has raised fears of a deflationary spiral. Shafik said the European Central Bank, which has announced a raft of measures in recent weeks to attempt to breathe some life into the flagging economy, could not be expected to solve all the region’s problems alone.
“We hope that will work but of course everyone knows monetary policy can’t do all the heavy lifting and so there needs to be more growth-orientated fiscal policy and structural reforms to make the big economies particularly in Europe, France, Italy and so on, more competitive.”
Shafik refused to be drawn on whether she was a hawkish member of the MPC – with a tendency to favour higher rates – or a dove – with a tendency to favour lower borrowing costs: “I asked my children this question and they said, ‘Mummy, you should say you’re an owl’. Look at the data, try and be wise.”
