Bank of England minutes reveal committee divided on economic slack

Peter Spence
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The minutes of the Bank of England's most recent Monetary Policy Committee (MPC) meeting show no signs of tightening on the horizon.

Members of the central bank's interest-rate setting committee voted unanimously to hold policy.

With nominal wage growth picking up in recent months, the members determined that a "sustainable rise in real wages and incomes ... was in prospect."

Looking at single month data released last week, after the meeting took place, volatile single month data suggests that real wage growth has now returned. Last week also news that unemployment fell below the symbolically important seven per cent level. That was previously the level at which the MPC had committed to considering a rise in interest rates.

Since introducing that form of forward guidance last August, the Bank of England has changed tack and swapped out its quantitative threshold for something more qualitative. Now the UK's interest-rate setting committee is looking for signs that spare capacity in the economy - specifically the output gap - has been tapped out.

The minutes show that "there was considerable uncertainty about the amount of slack remaining within the economy" and the members of the committee "had a range of opinions on this" as well as the outlook for inflation in the medium term - as World First's Jeremy Cook puts it, "a very macroeconomic way of saying 'your guess is as good as mine, old chap'".

A bit of a mixed message from Threadneedle Street. Unemployment was originally chosen as a measure of spare capacity because it was easy to communicate, while the output gap is one of the more complicated concepts in economics. In an attempt to avoid hiking rates the central bank has taken away forward guidance, and granted us fuzzy guidance instead.

Samuel Tombs, UK economist at Capital Economics, suggests that with the MPC recognising that inflationary pressures have eased, and emphasising the widening of the current account deficit, "it still seems unlikely that the MPC will raise interest rates within the next year or so."