–Adds Detail To Version Transmitted At 1138 GMT

London (MNI) – There is still time for the economy to be allowed to
recover before policy tightening needs to begin, Bank of England
Executive Director Markets Paul Fisher said in comments published
Tuesday.

Fisher set out a downbeat view of the economy, saying he was not
certain the recovery would continue of its own accord. He highlighted
the pressure on household real incomes, and the downside risks to growth
in the near term.

Fisher voted to keep policy on hold in May, and he said it was even
possible further monetary easing could be justified.

“I believe there remains time to allow the economy to recover
before the eventual tightening begins,” Fisher said.

“I am not trying to give any hints today as to exactly when that
(tightening) will be. I honestly don’t know,” he said.

The MPC member argued that a hike now in Bank Rate may be exactly
the wrong thing to do, with growth and confidence vulnerable.

Fisher said there are “immediate downside risks to the growth
outlook. Although my central expectation is that the recent weakness
will just be a soft patch, I do worry about a more prolonged weakness in
demand, and in particular, consumer spending.”

“That could knock the recovery off course for a sustained period,
shifting the balance of risks around medium-term inflation to the
downside. With that risk in mind, putting up Bank Rate could be exactly
the wrong thing to do at this precise moment,” he said.

Fisher warned that if a hike in Bank Rate “further damaged consumer
confidence then it could be the marginal factor that makes a soft patch
turn into something worse.”

Fisher backed the projection in the BOE May Inflation Report that
showed inflation risks broadly balanced around the 2% target over the
medium term.

He was, however, particularly gloomy about the outlook for domestic
consumption.

“I wouldn’t be surprised if there was only slow growth in consumer
spending over the next year or so. The risks around that are probably
skewed to the downside,” Fisher said.

He highlighted the fragility of the recovery and said “Until
underlying growth resumes, we can’t be certain that it will, of its own
accord. At the very least, that makes me pause to consider when policy
should start to be normalised or even whether further loosening might be
justified,” Fisher said.

Wage Growth Too Low: Not Compatible With 2% Target

Three of Fisher’s colleagues have cited the risk of elevated
inflation feeding through into higher inflation expectations and on into
wage growth as a reason for tightening policy.

Fisher, however, argued that current wage growth is too low rather
than too high and he said he believed the slack in the labour market is
likely to push down on wages for years to come.

“Real incomes have stagnated over the past three years,” Fisher
said.

He noted that nominal regular pay growth, that is excluding
bonuses, has averaged around 2% over the past year.

“Assuming that the potential growth rate of the economy has not
been damaged by the financial crisis (and there is no compelling
evidence to suggest that it has), then this level of wage growth would
be too low to be consistent with the inflation target in the medium
term,” Fisher said.

–London bureau: +4420 7862 7491; email: drobinson@marketnews.com

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