BOE’s Cunliffe Sees U.K. Productivity Picking Up Modestly

Bank of England Deputy Governor Jon Cunliffe said productivity is likely to improve in the next few years as a period of “very cheap labor” comes to an end.

“We can, I think, now point to an alignment of factors that suggest that productivity growth will start to move in the right direction,” Cunliffe said on Monday in a speech in Luton, England. “We are not forecasting a sustained burst of high productivity growth, but a rather more modest pickup.”

Cunliffe’s speech chimes with the BOE’s view that the British economy should become more productive after a period when officials puzzled over why wages started to rise without a commensurate increase in output per worker. The Monetary Policy Committee sees the inflation rate rising later this year from a trough of minus 0.1 percent in April.

A sustained pickup in pay without a corresponding increase in productivity “would mean upward pressure on prices,” Cunliffe said. “It would mean greater pressure on the MPC than in our forecast to act to bring supply and demand into balance so as to meet the inflation target.”

Cunliffe cited the improving prospects for the finance industry and rising business investment among the reasons for optimism on productivity in the economy.

Policy makers decided to keep their key rate at a record low 0.5 percent this month. Minutes show the decisions of two MPC members were “finely balanced” favoring a tightening. Officials argue weak price pressures are temporary and should increase towards the end of this year.

Cunliffe said data show that Britons’ price expectations are not becoming destabilized by the bout of low inflation. While the MPC is aware of the risk and ready to counteract it, expectations about inflation over the past six months have so far remained “pretty anchored,” he said.

“We seem now to be coming to the end of the reservoir of labor capacity and to the end of low-cost labor,” he said. “So if productivity were to continue to disappoint over the next few years, other, lower growth outcomes are likely to follow. I have set out why I think that is not the most likely scenario.”

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