Bank of England says slack as fallen as Mark Carney focuses on wages

PUBLISHED : Thursday, 14 August, 2014, 1:28am
UPDATED : Thursday, 14 August, 2014, 1:28am

The Bank of England said the amount of spare capacity in the economy has fallen as it lowered its forecast for wage growth and said it will put more weight on earnings in its policy assessment.

In their Inflation Report yesterday, policymakers led by governor Mark Carney said the amount of slack in the economy is in the region of 1 per cent of gross domestic product.

That compares with a previous estimate that put the mid-point at 1.25 per cent. While the bank said slack is being absorbed faster than previously anticipated, it said the pace of erosion will slow, which "should curb the build-up of domestic inflationary pressure".

The report highlights the problem for policymakers as they balance a strengthening economy and the need to move away from emergency policy settings against below-target inflation and subdued earnings.

"Uncertainty about how much slack there is has increased in recent months, in part reflecting labour-market outturns," the bank said.

In light of this, the committee "noted the importance of monitoring the expected path of costs, particularly wages, in assessing inflationary pressures".

The committee kept its benchmark rate at a record-low 0.5 per cent last week. Speculation is mounting among forecasters that it is on the verge of a split, and the committee said it has a "wide range of views" on the amount of slack in the economy.

The bank now sees annual growth in wages in the fourth quarter at about 1.25 per cent, from 2.5 per cent estimated in May. The projection for wage growth at the end of next year was cut to 3.25 per cent from 3.5 per cent.

The wage data contrasts with a strengthening labour market, with the unemployment rate falling to 6.4 per cent in the three months to June.

The committee said these "conflicting signals have underscored the uncertainty" about the level of spare capacity.

The bank also forecast the economy will grow 0.7 per cent this quarter, and raised its full-year outlook to 3.5 per cent from 3.4 per cent in May. It also said inflation will remain below its 2 per cent target for the forecast period to the third quarter of 2017.

"The expansion in output is projected to move to a firmer footing as productivity and real incomes revive," the central bank said in the report.