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

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".