Closed Live Blog: BoE inflation report

Treasury Select Committee...Bank of England governor Mark Carney answers questions in front of the Treasury Select Committee in the House of Commons, central London, on the subject of the Bank of England's quarterly inflation report and Scottish independence. PRESS ASSOCIATION Photo. Picture date: Tuesday March 11, 2014. Later today he will answer questions on the 'Economics of currency unions' and the Bank's Foreign Exchange Market Review. See PA story ECONOMY Bank. Photo credit should read: PA Wire

The Bank of England will weigh the weakness of Britain’s wage growth against the strength of its economic recovery when it delivers fresh forecasts in its quarterly inflation report on Wednesday morning, containing signals about when a rise in interest rates is likely.

To be delivered in tandem with the latest UK employment data, the BoE’s estimates of the amount of slack in the economy will be one of the most closely watched metrics. At the last quarterly inflation report in May, the BoE estimated the amount of spare capacity was between 1 – 1.5 per cent, judging there was room for this to narrow further before rates tightened.

By Sarah O’Connor and Claer Barrett

Welcome to the FT’s live blog on the Bank of England’s quarterly inflation report. This morning’s official labour market data will intensify the dilemma for the Bank of England as it weighs how soon to raise interest rates from their record lows.
Data released less than a hour ago show Britons’ wages have fallen in cash terms for the first time since 2009 even as unemployment continues to drop, sending conflicting signals about the strength of the UK economy.

Mark Carney has started his prepared remarks. The MPC has revised up its expectation for near-term growth – it expects growth to slow a little later than it thought in May. The MPC also expects unemployment to fall faster than it thought in May, and inflation to remain around the 2 per cent target over the forecast period.

Thus far, output growth has been more than matched by employment growth, Carney says. “All of these labour market signals tell us that slack has been used up at a faster pace than we had anticipated – but that’s not the end of the story.” Pay growth has been “remarkably weak” and it seems there’s been an increase in labour supply, especially among older people.

Here’s the link to the FT’s story on this morning’s employment data:

There’s a wide range of views on the MPC about the amount of slack – the central estimate for slack is now about 1 per cent of GDP (in May it was 1 to 1.5%)

Carney stresses the MPC doesn’t have a target for wage growth

The path of Bank rate will be gradual, Carney stresses. “Small, slow increases” could help mitigate the risk that higher borrowing costs would derail the economy. Carney also says that even if all the slack in the economy was eliminated overnight, interest rates would not need to be much higher than they are now – because of all the persistent headwinds facing the economy in the wake of the crisis.

Carney concludes that how normal the “new normal” will be depends ultimately on productivity growth. He concludes: “Interest rates can be expected to increase…but the normal interest rates of tomorrow are likely to be different to the normal interest rates of yesteryear.”

Here’s a link to the full Inflation Report

Now the questions begin. A year ago we had expectations productivity growth would be stronger, Carney admits, adding that the productivity shortfall is widening. He states the “big calls” made in today’s report are that there is more slack in the economy, and a change in “how fast the economy can run”. He says this is consistent with a labour supply shock to the economy, as “businesses have substituted labour for capital”. “It is not something that suggests there is a structural break in the productivity potential of the economy”.

Now a question about geopolitical risk…

The FT’s Emily Cadman and Sam Fleming are in the press conference and tweeting the key points.

Next question: what about the impact of geopolitical tensions? Carney says we have to look at the channels back to the UK economy, potentially through commodity prices, risk premia, exports. “I would say it’s early days but it’s something we have to monitor” (but right now he sounds quite relaxed.)

Next question: what will the trigger be when it comes to wages?

Just in from the FT’s markets guru Jamie Chisholm:

Early market reaction is that traders see comments as dovish. Sterling at session lows, down 60 pips to $1.6750 and rate-sensitive 2-year yields are bucking broader fixed income trend with a 3 basis point dip to 0.79 per cent.

The starting point for degree of slack was greater than we thought, Carney explains. He stresses there is a wide range of views on this within the committee and that the BoE will be “learning as we go”. There is no “magic number that would unlock the moment when we adjusted rates” he says adding the BoE will “continue to monitor the labour market very carefully.”

(Ripples of laughter as Mark Carney is asked if UK consumers should take his pronouncements on interest rates with “a pinch of salt”)

Punchy question (from Larry Elliot at the Guardian): Isn’t it true that the Bank hasn’t got a clue what’s going on out there? And anyone planning to take out a mortgage based on your guidance would be foolish to do so?

“Thank you Larry,” replies Carney with a grin – prompting a ripple of nervous laughter. “A household making a decision about borrowing – it’s relevant that interest rates are going to be higher, it’s relevant they;’re not going to be sharply higher. It’s very relevant for businesses. I find it (he’s talking about forward guidance) is actually quite useful. But it’s not a guarantee

Read the full FT story here on how the BoE has lowered its wage estimate for 2014 from 2.5 per cent to 1.25 per cent, also shading down its estimate for 2015

Ben Broadbent, new deputy governor, chips in: Of course we’re uncertain, but there are good reasons for saying what we’ve said. “As for slack, the truth is we’re confronted with these two conflicting signals (on wages and unemployment) – but that’s not the same as saying we’re clueless.”

Next question – is policy being geared towards the “lucky workers” with decent wage settlements, leaving behind the vast majority?

Carney says the majority of households, in the absence of wage increases, would have to take “significant expenditure adjustments” if rates increased to 2 per cent. Another reason why he expects interest rate increased to “move gradually” when they do begin. Low, stable, predictable inflation remains “resolutely the focus”.

Paul Waugh, politics watcher and editor of, reckons George Osborne will be pleased with Carney’s tone.

Next question on the housing market and mortgages: Carney says he doesn’t want to drift into FPC territory, but says there’s broad agreement that the new MMR rules would have largely “transitional” effects rather than permanently slowing lending.

Carney asked how he reconciles 3.5% GDP growth with low interest rates

I know it’s boring and receptive, but we’re focusing on the likely path of interest rates, Carney says in response.

David Kern, Chief Economist at the British Chambers of Commerce, comments on this morning’s jobs data:

Wages growth declined on the quarter for the first time in five years, which is a warning sign that the economic recovery although on the right track, is still fragile.>

Next question: would you like to comment on the market’s expectations for interest rates? Carney says he won’t comment on the market’s expectation on the timing of the first hike. “What I’ll re-emphasise though, in terms of the overall shape of expectations, is they are consistent with a path that is gradual and limited, and in our judgement, that path is consistent with achieving the inflation target”.

In other words, the MPC is comfortable with the general market expectation for how quickly rates will rise over the next few years.

Is raising rates gradually the equivalent of “slowly boiling a frog” the governor is asked…

A question on Scotland: is it time for Salmond to produce a plan B on currency? Carney says “We don’t have a vote on this and don’t want one.” Elected politicians will decide about the currency. But we do take note of the decisions of the 3 main Westminster parties to rule out a currency union, but we’ll implement whatever we’re asked to implement.

We also have responsibilities for financial stability in the UK, and we’ll continue to discharge those until they change.

The FT’s James Mackintosh asks if Carney is “further towards the cluelessness end of the spectrum”… Can we agree the spectrum is between “perfect certainty and uncertainty” Carney asks

We have been looking at this issue of how much of a labour supply shock we’ve had over the course of my time at the BoE, Carney says. But uncertainty is not a reason for stasis – we do have to make judgements.

Some early reaction from economists is coming in. Here is James Knightley at ING:

The general tone of the Bank of England’s latest Inflation Report is mildly dovish and has seen market rate hike expectations being nudged back marginally and sterling soften. While acknowledging that the recovery continues to “broaden”, underpinned by stronger consumption and investment spending, they have actually lowered their inflation forecast for 2 years’ ahead. Previously they were predicting 1.9%, but now it is 1.8% while they have nudged up their GDP growth forecast for 2014 to 3.5% from 3.4%, based on market interest rate expectations.

It’s not the case that we’ve overhauled our models and entire framework of thinking, given the events we’ve had and the behaviour of productivity ,adds Ben Broadbent.

And we’re onto the next question (from the Times): is the economy going to return to “healthy” and sustainable growth?

Thus far, growth has been relatively broad based, says Carney. This is not a debt-fuelled consumption recovery, he says. Households have been reducing their savings rate, not sharply increasing their borrowing. The big question is whether productivity growth will pick up (the BoE has dropped its forecasts on that quite a bit). But I wouldn’t be definitive that this is a healthy, sustainable path of growth, it’s still part of a transition to a more balanced economy.

Simon Jack from the BBC Today programme thinks the BoE is torn in two directions by the labour market data.

Are markets reacting to data flow better than they were, Carney is asked. The reactions to good and bad surprises have been “more consistent” than those seen during the financial crisis, he says, adding that people in the real economy should be encouraged by this – “unless you’re trading short sterling”.

And we’re back to questions on Scotland ( even though Carney doesn’t seem keen to wade into this debate again).

On the sustainability of currency arrangements, Carney refers us to his speech in Edinburgh at the start of this year (here’s a reminder of what he said then)

Carney also talks about financial stability issues in Scotland. We have contingency plans that we develop, but it’s never a good idea to talk about them in public. In terms of our responsibilities for financial stability, we do have a wide range of tools and plans. Some of the powers we have are held jointly with the Treasury.

Next question: more on the timing of the eventual rate rise, and if it’s better to “go earlier”. Theoretically yes, says Mr Carney, but this is an argument on the margin. The decision of the MPC in August was not to move the bank rate. Economic expansion is continuing, individuals should expect the bank rate to rise, but he will not comment further on the “precise jumping around on timing”.

Economists are seeing this report as dovish

Here’s Samuel Tombs at Capital Economics:

Today’s Bank of England Inflation Report has struck a relatively dovish note in projecting inflation to remain below the 2% target over the next two years and arguing that the recent weakness of wage growth suggests that there is still a fair amount of spare capacity in the labour market. Indeed, the MPC only reduced its collective estimate of the present amount of slack from a range of 1% to 1.5% of GDP in May to “about 1%”. And with its forecasts for GDP growth (assuming that interest rates rise in line with the path expected by markets) over the coming years broadly unchanged (2014: 3.5%, 2015: 3%, 2016: 2.7%), the Bank continues to expect spare capacity to be reduced at a more gradual rate than seen recently.

James Mackintosh, the FT’s investment editor, is intrigued by the Scottish question:

A question on “new” forward guidance. “You’re muddled, I’m afraid,” Carney tells the poor journalist. “I know it’s dull, I know it’s repetitive – it’s limited and gradual…I explicitly said “wages are not a new threshold” in anticipation of your question. It’s consistent, it’s boring, but that’s what you get.

A question on “new” forward guidance. “You’re muddled, I’m afraid,” Carney tells the poor journalist. “I know it’s dull, I know it’s repetitive – it’s limited and gradual…I explicitly said “wages are not a new threshold” in anticipation of your question. It’s consistent, it’s boring, but that’s what you get.

Here’s a great chart from FastFT:

Discussion is now moving on to the UK’s housing market….

Carney says individuals should expect there’ll be some increase in interest rates over the course of the next three years.

Now questions turn to the recent growth in self employment – 14 per cent of the labour force and rising – should we be worried about this, Carney is asked?

Here’s a reminder of the speed of the housing market’s recent recovery:

Here is Chris Williamson, economist at Markit, on the inflation report:

“There’s little new to be gleaned in relation to the timing of the first rate rise. The Report and recent rhetoric from policymakers gives the impression that rates will not rise until wage growth is showing clear signs of picking up. While it seems likely that calls to raise interest rates will start to gather strength in coming months, a majority vote for a rate rise still looks some way off. February therefore still looks the most likely month for the Bank to dip its toe into the water as far as tightening policy towards more normal levels is concerned, though November remains a possibility if the wages data pick up in coming months (please also see comments from prior email highlighted below into uncertainty about policy decision).

Carney says BoE has looked at its implications on wage pressures and productivity, noting that the numbers of self-employed fell (as a proportion) between the first and second quarters of this year. Broadbent adds that a greater share of self-employed workers isn’t necessarily bad for productivity.

Carney is asked about what the latest data means for interest rate rises. He says unit labour cost growth, even with weak productivity, is basically flat (even though productivity has been poor).

But we’re also seeing a little bit more momentum in the economy than we had anticipated. The momentum in the economy is more assured. We have to take all of those things together in taking our judgements.

The FT’s Sam Fleming asks about the Eurozone and what impact this will have going forward…

The BoE is also live-tweeting its own press conference. With pics.

The ECB’s LTRO mechanism is going to take some time to start having an impact, Carney says. Draghi was very clear about that when he made his announcement, he says, inviting new MPC member Minouche Shafik to comment. She says the implications for the UK are that we cannot rely on robust growth in the Eurozone to support its own recovery.

And that’s the end of the press conference. Here’s a link to Carney’s prepared remarks. Quick summary to follow.

Here’s a summary of the highlights:

1) The BoE has slashed its forecast for annual wage growth this year in half, to 1.25 per cent. It has also nudged down its inflation forecast for 2 years down a touch. The market sees these as dovish signals

2) On the other hand, the MPC now thinks the amount of slack in the economy is about 1% of GDP, down from its 1-1.5% estimate in May. It has also revised up its short-term growth forecasts a little.

3) Carney said “the Committee will be placing particular importance on the prospective paths for wages and unit labour costs”. But he was at pains to stress the MPC did not have a new “wages threshold” that would determine when rates would start to rise.

4) The MPC is comfortable with the market’s expectations for the future path of interest rates. Investors expect rates to start to rise early next year and go up about 15 basis points per quarter.