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UK consumer slowdown underway, caution needed on rates-Bank of England’s Vlieghe

A consumer slowdown was already underway in Britain, says Bank of England rate-setter. (AFP)
LONDON: Bank of England rate-setter Gertjan Vlieghe said on Wednesday a consumer slowdown was already underway in Britain and was likely to worsen, underscoring the need for caution on interest rates.
Vlieghe, who is considered one of the central bank’s most dovish policymakers, repeated his view that a premature rate hike was more dangerous than one that came too late.
He also said weak wage growth meant the ongoing rise in inflation, pushed up by the fall in the value of the pound since last June’s Brexit vote, was unlikely to turn into something more damaging.
“The consumer slowdown, which initially did not materialize, now appears to be underway,” Vlieghe said in a speech delivered at the offices of Bloomberg in London.
“Given the hit to real income from a mix of subdued wage growth and rising inflation, I think the slowdown is more likely to intensify than fade away.”
The BoE is widely expected to keep interest rates at their record low throughout this year and possibly until 2019 as it steers the British economy through the uncertainty linked to the exit from the EU.
However, one rate-setter — Kristin Forbes — voted last month for a rate hike and others said they might follow suit soon if there were signs of inflation picking up by more than expected or that economy was maintaining its momentum of 2016.
To consider a rate hike, Vlieghe said he would need to see evidence that inflation pressures were spreading beyond the effect of sterling’s depreciation, or that there was a pick-up again in household spending and borrowing.
Vlieghe also warned that a “more material” fall in business spending might take place in response to uncertainty around Brexit, given the two-year clock on the negotiations with the European Union had just started.
In his speech, he addressed criticism of the BoE for its warning, made before last year’s Brexit vote, that Britian’s economy would face a quick and sharp hit in the event of a decision to leave the EU, something which has not yet happened.
Vlieghe said the BoE had been less pessimistic than many other forecasters and, in any case, its decision to cut rates in August had been the right one. “I would take exactly the same action again if faced with the same circumstances,” he said.

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