Bank of England policy maker Martin Weale said spare capacity in the U.K. economy may be eroded faster than officials’ central forecast shows and could be used up in the next two to three years.
Weale said his analysis of the labor market suggests slack is about 0.9 percent of gross domestic product, less than the range of 1 percent to 1.5 percent the Monetary Policy Committee presented in its quarterly forecasts last month.
The comments late yesterday underline a key area of divergence among officials after Governor Mark Carney said this month that spare capacity, which he has set as a key policy measure, is “at the upper end” of the range. Weale said he’s comfortable with the “broad pattern” of the projections published by the central bank in its February Inflation Report.
“Rather, I think the forecast is broadly consistent with slack being used up over the next two to three years, while the collective judgment of the committee was that slack would remain at the end of that period,” Weale said in the speech in Windsor, England. “The overall degree of uncertainty surrounding this is of course considerable.”
Weale also said that wage growth remains “exceptionally low” and unemployment can fall further without stoking inflationary pay pressure.
“With wage growth currently well under 2 percent, I do not think there are many economists who would doubt that unemployment can fall some way before the economy faces any risk that wage pressures in a tight labor market will push inflation above target,” he said.
The central bank has linked policy to the labor market and the MPC has said it won’t consider raising its key interest rate from a record-low 0.5 percent until unemployment falls to 7 percent. With the economic recovery strengthening and that threshold approaching, the MPC refined its forward guidance last month to say there is scope to continue to maintain loose policy to absorb slack in the economy.
In a survey published today, Markit Economics said 46 percent of U.K. consumers expect the BOE to begin rate increases within the next 12 months. That’s unchanged from its poll in February. Just 9 percent anticipate no tightening for the next two years.
Weale also said the central bank’s mandate to target 2 percent inflation means that officials can’t promise a particular path of interest rates.
“While I expect interest rates to remain low over the next two to three years, it is not possible to guarantee this,” Weale said. “We set interest rates to deliver that inflation target in light of the economic facts.”