Bank of England policy maker Ben Broadbent said officials should place more importance on employment data as it may provide a better guide to the inflation outlook than changes in output.
“We should probably pay less attention than we normally do to movements in output and relatively more to changes in employment,” Broadbent said today in Durham, England, referring to the Monetary Policy Committee. “We may be less confident than usual about the origins of a given change in output -- whether it’s ‘demand’ or ‘supply’ led.”
In a speech looking at U.K. employment growth and the outlook for productivity, Broadbent also noted comments by Chief Economist Spencer Dale last week that a “Pavlovian response” to weak output by calling for more stimulus is not sensible. They were the only two policy makers to vote against more quantitative easing in July, when the central bank increased its bond-purchase target by 50 billion pounds ($81 billion).
On the relationship between employment and inflation, Broadbent said the link between the two “has proved more stable through the crisis than those between either of those variables and output.”
“What we do know is that, whatever the original disturbance, and as long as the supply of labour -- and therefore the NAIRU -- is relatively stable, we’re likely to want to ease policy if employment falls -- because either demand has weakened or underlying productivity has risen -- and to tighten it if employment growth improves,” he said. NAIRU is the non-accelerating inflation rate of unemployment.
Broadbent also noted that the comparative strength of employment and inflation was “remarkable,” though demand “is independently weak.” He said the MPC should set policy “not just on its ability to affect demand but its capacity to improve the flow of finance in the economy as well.”
“Much of this lies outside our control, and depends, as I argued in a speech earlier this year, on events in the euro area,” Broadbent said. “But that doesn’t mean domestic policy is powerless.”
The Funding for Lending plan, started by the central bank and the Treasury last month, may help counter a slowdown sparked by the threats from the euro debt crisis, he said.
“If, as the MPC expects, the Funding for Lending Scheme helps to promote the supply of finance across the economy, it’s likely it will also improve its allocation,” he said.