John Aglionby Closed Live blog: The Bank of England’s quarterly inflation report

Bank of England Governor Mark Carney will come under pressure when presenting the bank’s quarterly inflation report on Wednesday to explain how the central bank proposes to cool the housing market without derailing the wider economic recovery.

By John Aglionby and Sarah O’Connor

Good morning. Mark Carney will start his press conference an hour after the Office of National Statistics announced that average earnings in the UK have edged ahead of inflation for the first time in four years. It also announced that the unemployment rate fell to 6.8 per cent of the workforce.

FT reporter Brian Groom writes:

Average earnings were up by 1.7 per cent in the three months to March on a year earlier, nudging ahead of March’s 1.6 per cent consumer price inflation rate. That was the first rise in real wages after a six-year squeeze, apart from a bonus-related blip in 2010.

However, the increase was below the 2 per cent that economists had predicted, suggesting that growth in real wages may be slow to pick up. Excluding bonuses, the increase was only 1.3 per cent, down from 1.4 per cent in last month’s data.

There are three key things to look out for today:

1) How much slack does the MPC think is left in the labour market? Has that view changed since their last Inflation Report in February?
2) Given that, how soon does the MPC expect to start to raise interest rates?
3) Will the MPC give any signals that the BoE’s other key policy committee – the FPC – will use macroprudential tools to cool the housing market?

Sterling has fallen on the back of the unemployment data being weaker than forecast. It is currently at 1.6814 to the dollar.

FT economics editor Chris Giles blogged yesterday on how much slack he thinks is left in the labour market. His conclusion: Not much

Carney has started talking. He says there has probably been a modest narrowing of the spare capacity in the labour market but that “significant slack” remains – highlighted by 1.4m people still working part time and the unemployment rate being above the equilibrium rate.

The FT’s Chris Giles has just sent a news story on the report, which he has read in the BoE’s lock-in. Here is the key information:

The Bank of England confirmed City expectations that the first rise in interest is likely within a year, but its latest forecasts showed that only a modest tightening of monetary policy was sufficient to keep inflation in line with the bank’s target over the next three years.

In its quarterly inflation report on Wednesday, the central bank’s forecasts for growth and inflation continue to predict a rapid non-inflationary economic recovery, but the BoE now thinks unemployment will fall faster than it did in February.

The sanguine forecasts suggest the BoE is confident it can help foster a strong and sustainable recovery without the economy being blown off course by a rampant housing market.

“A gradual strengthening in productivity and real incomes, together with growing confidence of companies to invest, should underpin the durability of the expansion,” the central bank said.

Carney: The best collective judgement of the committee is that spare capacity is about 1 to 1.5 per cent of GDP. It will reach the pre-crisis average rate at the end of the forecast period.

Here is the full Inflation Report

Carney: The risks from the euro area are two sided, there are risks from shadow banking in China, uncertainties over the normalisation of monetary policy and geopolitical factors.
Heading back to normal will be accompanied by higher levels of volatility

The FT’s Chris Giles says there is little in the report on the housing market.

The BoE avoided much discussion of rapidly rising house prices in the report, saying merely that it expected the rate of increase in property prices to be maintained and that “the house price to earnings ratio remains below 2007 levels”. The report gave little indication that the central bank felt it needed to take imminent action to use its powers to cool the housing market.

There are bound to be lots of questions about it in the press conference though.

Carney: Inflation is about 1 percentage point lower than we had expected – mostly due to one-off factors. The outlook in the medium term remains benign. Pay growth is expcted to reach 2.5 per cent by the end of the year.

The FT’s economics reporter Emily Cadman is also in the room. She says the BoE’s view on slack hasn’t changed much.

Carney: The exact rate of any timing of interest rates will depend on the evolution of the economy, the amount of slack, the prospects of it shrinking and inflation. BOE will continue to monitor a broad range of indicators.Discussions of timing should be kept in perspective.

Carney: The bank rate may stay at historical low rates for some time even if it is raised. Asset purchases will not be changed until bank rate has moved and is stable.

Carney: The economy has only just begun to head back to normal.

“Securing the recovery is like making it through the qualifying rounds of the world cup. That’s a major achievement but the actual tournament is only just about to begin.”

So basically it’s a recovery of two halves and several rounds….

The FT’s Emily Cadman is at the press conference:

And we’re onto the press conference. First question is from ITV: can borrowers take comfort that interest rates won’t rise as quickly as the market thinks? Carney says the exact timing of the first rate hike will be a product of the evolution of the economy. “Today’s not the day” as there’s still plenty of slack.

Question on spare capacity. Carney says there’s a pretty marginal change in the GDP forecast. Also, the BoE is still cautious about productivity. The combination of those two factors means the change in the amount of spare capacity is marginal.

Question on whether there’s a housing bubble.

Carney says monetary policy tools would not appropriate at this stage to address rising house prices. High LTV mortgages are still below the level at the height of the crisis. There has also been an improvement in underwriting standards.

“On the other hand mortgages are not just for Christmas” …

…but over the balance of people’s lives, so the FPC will look hard and there’s a range of tools that it could use to address vulnerabilities in the housing market.

So he dodges a bit basically.

Charlie Bean, outgoing deputy governor, says his own view is that spare capacity is inherently fuzzy – there could be 1-1.5% of GDP’s worth, there could be more, there could be less. We shouldn’t get hung up on “spurious precision” about it.

Investors are taking the report and labour market data as dovish – pushing down sterling and pushing back interest rate expectations a little.

This just in from the FT’s markets reporter Jamie Chisholm:

Sterling, which had already given up session gains after some slightly softer than forecast jobs data, is down 0.2 per cent to $1.6786 and losing 0.3 per cent versus the euro to 81.7 pence. The market is pushing back the timing of interest rate rises, with 2-year Gilt yields, which on Tuesday touched 0.80 per cent, down 6 basis points on the day to 0.69 per cent. The FTSE 100 has not budged.

Question from the FT’s Chris Giles on whether we should take comfort that this time the recovery is different from 2005.

Carney: The lesson I take and institutionally we take is that in the period prior to the crisis you can have periods of price stability.
What’s different today is that where the risks lie are not just to price stability but to financial stability. Those domestically are centred around the housing market. Today we have a much broader suite of tools and have a broader mandate to mitigate those risks. What we need to do is ensure the various committees, analysts, economists are talking to each other so we act in a way to fully exploit the synergies between the FPC and MPC to ensure an environment of low inflation stability.

Next question: is the new top for rates about 2 per cent? Nice brief answer from Carney: “It’s not that specific, no.”

As for the shape of the recovery, Carney says the economy is starting to look more balanced, there are good signs on investment. But for the balance to sustain, we need to see productivity pick up – that’s the only way to get sustainable real wage growth. The savings ratio can’t keep falling.

“We haven’t yet seen that turn on the supply side, productivity growth is still quite choppy and quite low. Real wage growth hasn’t happened yet.

Here’s a reminder of that “choppy and low” productivity picture in the UK.

Question following up on the World Cup metaphor – the “squad” ie the economy, is in fine fettle but that things go wrong within a month. So, is Carney being complacent about the inflation risks?

Carney says not at all and that the analogy has been stretched too far.

This is an economy that is just catching up to the levels that the French and Italians have achieved. It has more momentum than some continental economies but there’s no complacency.

At present the MPC’s forecast is very much at the upper end based on expected growth.

We have very modest assumptions on productivity.

The economy is roughly 20 per cent less productive than the US economy. That is unlikely to persist because of a lack of structural changes in the economy.

There is a fair degree of slack and a benign global inflationary environment.

Here’s the BBC’s Robert Peston on Carney’s attitutde to dealing with the housing market:

Next question is on sterling. Carney agrees inflation is partly lower because of the strength of sterling.

He adds the movement in exchange rates have reflected the different pace of recovering in different

Important quote from Carney here: “Persistent strength in sterling will challenge the balance of the expansion.” He’s trying to talk down the pound.

Question on interest rates for those looking at taking mortgages.

Charlie Bean says BoE doesn’t expect to tighten immediately, there’s still slack that needs to be used up. And when the time does come, rates will rise gradually.

For some time the average level of policy rates is going to be lower than pre-crisis. That reflects continuing headwinds from the crisis and the extreme compression of risk premium is not likely to be a feature of the world.

Bean refuses to give an exact date.

Chris Giles agree Carney is trying to talk down the £££££££

Here’s sterling against the dollar

Another question on the housing market: Are these new untested macroprudential tools really up to the job?

Carney repeats that interest rates are the last line of defence – a decision the MPC would have to consider and take. Says he has a “high degree of confidence” in some of the tools – tightening certain mortgage affordability requirements to discipline underwriting for example. “But what we don’t have at the FPC is the ability to control all aspects of the housing market. The FPC will not build a single house.

“The FPC will not be targeting house prices either. What it can do is reduce risks that emanate from the housing market.”
(The unspoken but heavy hint here is that it’s the government’s job to deal with the chronic undersupply of housing)

Another question on sterling – when does its high value become an obstacle to rebalancing?

Carney: The exchagne rate is always an important relative price. We distinguish between level effects on inflation, which can be quite large, and the real effects that flow through the economy. Those real effects require persistent changes and what we can commit and will follow through on is we will use speeches etc to bring out those effects in terms of our forecasts.
We do need more balance during the expansion in terms of the drivers of growth. It will not endure through household spending. It will ultimately require some recovery in net exports. Persistent level of exchange rates will affect that.

Carney upbeat FPC can do its job with regard to the housing market

And we’re back to housing and the division of responsibility between the MPC and the FPC. Carney passes over to Spencer Dale, current chief economist, who’s joining the FPC next month. Dale talks about the ways the housing market affects the economy – “we don’t think house prices themselves are a big driver of activity – it’s transactions we think are the main driver.”

Question on how people have got used to cheap money and the impact of rising rates.

Carney says BoE is very aware of pressures people face, mostly because of past borrowing. It’s one of the factors that influences our forecasts for consumption – a reason why the forecast is muted.

Nice softball question for Carney: what has been the biggest challenge in the job so far? He replies it’s to make sure we fully realise the potential of this institution. And to turn the recovery into a sustainable one.

Question on the adverse distributional consequences of continued low rates – ie borrowers vs savers.

Carney: Ultimately these are political questions and should be taken by the appropriate authorities. We do recognise that monetary policy does have distributional consequences. Targeting specific asset prices is not the MPC’s policy. We take into the underlying dynamics. We do think that the level of volatility is going to increase as advanced economies head back towards normal. That will be a natural development.

If you don’t want to wade through the whole inflation report, here’s the annex containing the multi-coloured forecast fan charts

A question on the amount of slack in the labour market. Carney passes over to Spencer Dale, the chief economist. He points us to page 29 in the Inflation report where there’s a handy box on this question. “We do think the slack has got less over time”.

He is also asked about zero hours contracts. He says the data suggest lots of people are still underemployed.

Channel 4′s Faisal Islam is wondering what exactly Carney meant by saying rates would stay low:

The FT’s Chris Giles thinks Carney is more dovish than some of his colleagues:

Question on low level of volatility in financial markets and how central banks are part of the problem.

Carney says that the first phase of guidance was setting out minimum conditions for adjusting bank rates. That gave a high degree of comfort for businesses and markets.
Now e’re on the second phase of guidance and that focuses much more on the medium term.
We’ve tried to focus on the conditions that need to be in place for changes in the bank rate. There’s considerable uncertainty about the amount of slack in the economy, most notably productivity growth and real wage growth.

Also, there’s some dampening on volatility because of rates being so low. And financial reforms have moved liquiditiy risk financial institutions and that has not been fully priced into markets, in the BoE’s view because it hasn’t been tested that much yet. So BoE expects a liquidity premium to be priced in.

Final question: If the London economy is overheating while the rest of the country is quite chilly, which will take precedence? Carney says the MPC sets policy for the country as a whole, not any one region. As strong as London and the South East appears, it can’t sustain an expansion in the whole UK.

Carney drags out his football metaphor – three of his colleagues are being “transferred” and this is their last Inflation Report. (Those moves are part of a big upheaval at the Bank which will change the make-up of these pressers quite a lot).

And finally Carney pays a little tribute to Charlie Bean who is “leaving the pitch” (retiring) after six years as deputy governor. “Thank god you were appointed deputy governor given the difficulties that have transpired since”.


Carney was very dovish, arguably trying to push back expectations on the timing of any increase in interest rates – but keeping his options open.
- He also talked down sterling, saying that sterling’s persistent strength will affect the balance of the economy and the recovery
- Real wage growth hasn’t happened yet as the economy has only just started heading back towards normal.
- Monetary policy is not the most appropriate tool to tackle rising house prices. The Financial Policy Committee does, however, have tools at its disposal to act if necessary. But it will not build a single house.
- There is still plenty of slack in the labour market. The MPC kept its estimate at 1-1.5% of GDP.
- MPC reiterates that asset purchases will not change until after rates have risen and stabilised at a new level.

Reaction to the inflation report is starting to come in. David Tinsley at BNP Parisbas writes:

“… a shift in language towards a more ‘hawkish’ stance is either very subtle, or absent entirely.”

He then gets quite critical of the MPC

“A sign of the determination to continue to remain dovish was the Committee maintaining its central estimate of the amount of spare capacity in the economy at 1.0 to 1.5% of GDP. As highlighted by today’s labour market data, the much looked for rise in productivity is still largely absent.The latest forecast is based upon market rate assumption that see the first hike not coming before Q1.

Overall it’s hard to get away from the impression that the MPC is increasingly taking risks on the economy that probably aren’t worth taking. A move to a stance that at least would be more clear about countenancing a tightening in policy would likely not dampen the growth outlook too much, but might help truncate some of the risks from a unknown level of slack as the unemployment rate hurtles downwards. At the same time risks from the housing market are clear and present, and relying on untried macro-prudential tools is itself a risk. The arguments in our view for a more explicit move to a tightening bias are becoming clear, and the MPC is getting further behind the curve.

John Longworth, director general of the British Chambers of Commerce, also would have preferred more clarity from the MPC on when rates will move:

“As the economy continues to recover, low interest rates remain crucial to maintaining business confidence and stoking business investment.

“It is not yet time for the Bank of England to raise interest rates. But the Bank must set out a clear road map for slow and incremental rises in rates, which would help businesses plan a successful transition from an exceptional situation towards a more normal one. Rates will have to rise as the economy grows, but in an orderly and predictable fashion. Big or surprise rate rises would be like a heart attack hitting a patient recovering from major surgery.”

The FT’s economics editor has decided the football analogies should be kicked into touch

Michael Saunders at Citi is surprised by two things in the Inflation Report:

“First, the MPC seems willing to make a fairly generous assumption that labour market slack will persist for a further extended period, despite the rapid drop in unemployment, sharp rise in vacancies, and survey readings that slack is being used rapidly.

Second, the Governor did not use today’s press conference to send a clear warning to households and businesses to prepare now for the shift to higher interest rates that is probably on the horizon. Such a warning would, we believe, have the useful effect of reducing risks that the mix of super-loose monetary policy and strong economic growth fuel a bubble mentality.

Going forward, we continue to expect the first hike to come in Q4 this year, triggered by continued strong economic growth and further tightening in the labour market. Of course, the MPC could opt to delay slightly past then. But the longer the MPC leave rates ultra-low with slack shrinking rapidly, the more likely it will be that tightening – when it comes – will not be “gradual” and will not leave the eventual level of rates below the pre-crisis norm.

And on that note we’ll blow the final whistle (enough of the analogies – ed) on this blog. Please continue to follow updates to the news at