Arab Today, arab today boe monetary policy may hinge on rate of uptake of slack in economy
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Arab Today, arab today
Arab Today, arab today

BoE monetary policy may hinge on rate of uptake of slack in economy

Arab Today, arab today

Arab Today, arab today BoE monetary policy may hinge on rate of uptake of slack in economy

London - XINHUA

The Bank of England (BOE) Wednesday unveiled its quarterly inflation report (QIR), and without any major change in inflation or growth forecasts it is the increasingly central role that the uptake of slack in the British economy plays in policy which is one of the chief talking points. Bank Governor Mark Carney made clear in his press conference that there had been a "modest narrowing" in British spare capacity over the past three months. However, the BOE estimated it still stood at about 1-1.5 percent of GDP, said Carney. Carney also said the rate at which the slack will be eroded will now slow down. The recent pace of erosion in slack can be seen in the latest official jobless figures, released Wednesday, which showed that in the three months to March, the unemployment rate was 6.8 percent, down from 7.2 percent in the previous quarter, and down 0.1 percent on the three months to February. Carney had introduced Forward Guidance (FG) policy in August last year to guide markets and householders on interest rates. FG promised a review of the Bank Rate when the jobless rate hit 7 percent. It was 7.8 percent at the time, and the rate of job creation has caught the BOE entirely by surprise and is indicative of recovery and a lessening in the slack in the economy. Higher pay deals, revealed in statistics published Wednesday, also indicate how slack is being eroded. Since the onset of the financial crisis at the end of 2008, British workers have seen their wage deals lag behind inflation. This year, for the first time since then, wage deals have overtaken inflation (CPI 1.6 percent in March). Wednesday's figures showed wages up 1.7 percent year on year when bonuses are included. The QIR was drawn up before these statistics were published, but Carney and his fellow members of the rate-setting Monetary Policy Committee (MPC) will see evidence in them that the British economy has, in Carney's words at the press conference, "started to head back towards normal". Carney said that a "sustained expansion" was now in prospect; he added that a sustained expansion was needed "to meet the MPC's intention of absorbing spare capacity over the next few years". SPARE CAPACITY: A "FUZZY CONCEPT" Carney was deliberately vague on a timescale for this absorption, with justification. Measuring slack in an economy is extremely difficult, a point made in the press conference by outgoing BOE Deputy Governor Charlie Bean. Bean, when asked what his estimation of spare capacity in the economy was, told journalists "spare capacity is by its nature a fuzzy concept. Potential output, equilibrium unemployment and things like that are not things we can observe in the real world; they have to be inferred and you need an economic model." From this it seems the BOE's policy moves in future will be informed by the unfolding of real-world outcomes and indications of growth and uptake of slack, but its current policy direction is guided by estimations of uptake which Bean says are questionable. "For me, it means they are highly uncertain; it doesn't make sense to try and put very precise numbers on them," said Bean. He added that his central view on the size of the slack in the economy was the whole of the 1-1.5 percent band. Bean said, "I can see the true level of spare capacity in the economy either being significantly smaller than that, or significantly greater than that; that reflects the reality of our lack of knowledge about the extent to which the economy can expand without generating additional inflationary pressures." This uncertainty about how much slack there is will affect predictions of how quickly it is taken up, and thus how soon the bank rate will begin to rise. Experts are predicting that a rise probably will not happen this year, but one is likely in the first half of 2015. Dr Howard Archer, chief British economist with IHS Global Insight, "In our view, the BOE QIR and Carney's remarks provide serious support to the view that interest rates are still most likely to start edging up around next spring" Archer said he believed the first rate rise would be from 0.5 percent to 0.75 percent in the second quarter of 2015, and will then edge up to reach 1 percent by the end of 2015.

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