Wednesday, May 21, 2014
Something stirring at the Bank of England
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

Today's minutes from the Bank of England's monetary policy committee were the most interesting for a long time, largely because of two paragraphs near the end:

These were the two:

"On the Committee’s central view, the pace at which slack would be absorbed was expected to slow from the end of 2014 as GDP growth eased slightly and productivity growth picked up. But there was considerable uncertainty around that central path, and a range of views among Committee members. The evolution of slack would depend on the timing and strength of the rebound in productivity growth, and on other developments in the labour market as the recovery continued, including the ease with which the longer-term unemployed were able to find work and the persistence of people’s desire to work longer hours as their incomes increased."

And, even more interesting:

"The Committee’s February guidance embodied the expectation that when Bank Rate began to rise, it would do so only gradually and to a level materially below its pre-crisis average. Although such a path for policy ran a greater risk of a build up in financial imbalances, particularly in the housing market, the Committee noted that the mitigation of such risks was, in the first instance, the
responsibility of the FPC: monetary policy should be only a last line of defence. The case for moving gradually and cautiously was reinforced by uncertainty over the likely impact on the economy of a rise in Bank Rate. It could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy. Against that, if productive potential were in part related to the level of demand, then the earlier policy was tightened the greater the risk of incurring a substantial cost in foregone output. Committee members placed different weights on these considerations and this was reflected in a variety of views on the appropriate path of monetary policy."

There are the beginnings of a strategy there - we are raising rates now so we do not have to raise them so much - but we don't know how much follow through there will be. The big changes due on the MPC, and the elevation to it of two new members whose views on the UK economy are unknown, creates a new uncertainty.

Anybody wanting ammunition to push for a rate hike could find it in the April retail sales figures. Retail sales volumes jumped by 1.3% on the month and were a huge 6.9% up on a year earlier. Trend growth over the latest three months was the strongest for a decade.