BOE's Tenreyro Sounds Optimistic Note on U.K. Productivity Woe

Updated on
  • Official says growth may pick up quicker than BOE expects
  • Says Brexit uncertainty is weighing on U.K. investment

Silvana Tenreyro, member of the monetary policy committee at the Bank of England

Photographer: Luke MacGregor/Bloomberg

The U.K.’s stubbornly weak productivity growth may pick up quicker than currently expected, which would have implications for the pace of interest-rate increases, according to Bank of England policy maker Silvana Tenreyro.

In a speech in London on Monday, Tenreyro offered an optimistic view of the long-term outlook for productivity, saying U.K. companies have all the fundamentals required to be at the “technological frontier.” That gives them scope to catch up with their international peers, who have seen substantially quicker gains in recent years.

Tenreyro, who joined the Monetary Policy Committee last year, said the economy will probably need two more rate hikes over the next three years if its November forecasts were accurate. That view has been echoed by others since the BOE raised interest rates that month to 0.5 percent from 0.25 percent. Still, she hinted that a better performance could change that outlook.

“A different outturn for productivity growth would affect that policy rate path,” Tenreyro said. “Although I concurred with our November projections for potential growth, the analysis I have discussed today leads me to think that in the medium-term, the risks to productivity may be skewed to the upside.”

Improvement, But No Turnaround

Productivity remains a long way below its pre-crisis growth trend

Source: Office for National Statistics

Note: growth measured on index where 4Q 2007 = 100

Stronger productivity growth would allow the economy to better meet demand without generating unwelcome inflationary pressures, which could reduce the need for tighter monetary policy. The risk of a supply squeeze played a big part in the BOE’s November rate increase, its first in a decade.

Tenreyro said that, as of December she saw “ample time” to assess current policy before increasing the key rate again.

The productivity weakness has marred the U.K. economy’s performance since the financial crisis, and expectations for a pickup have gone unfulfilled almost every year. While there has been some recent improvement -- output per hour rose the most in more than six years in the third quarter -- it’s still just 1 percent higher than ten years ago.

In what’s her first policy speech since joining the MPC, Tenreyro said manufacturing and finance have been the two biggest contributors to the slowdown in U.K. productivity since the crisis. In the short term, uncertainty surrounding Brexit is keeping investment at relatively low levels, which is likely hampering steps needed to boost productivity growth, she said.

“We will have to live with some of that uncertainty for some time,” Tenreyro said. “Understandably, firms will postpone some of the investments and structural changes needed.”

Fellow policy maker Dave Ramsden said last year that Britain’s exit from the EU is reinforcing Britain’s productivity malaise. Other economists, however, say that Brexit could actually shock firms into investing more in technology and machinery that improve output per hour. Tougher immigration rules -- restricting what is now an almost unlimited supply of labor from the EU -- might force them in that direction.

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