Carney’s new focus is spare capacity. Here’s what you need to know
The Bank of England has given a crucial update on spare capacity.
Notoriously difficult to measure, the Bank suggests that spare capacity stands at around one to 1.5 per cent of GDP, and that it is "concentrated in the labour market".
It's clear that governor Mark Carney is stressing the concept, and says that there is "scope to use more of that spare capacity", and that any spare capacity is "wasteful".
Referring back to Forward Guidance's introduction in August, Carney said that at the time "there was uncertainty about the degree of spare capacity, but high certainty that there was spare capacity."
While the central bank has been stressing communication, and making policy easy to understand, talk of an output gap may see the eyes of many glaze over.
As one member of the press pack pointed out, talk of an output gap is "about as complex as it gets".
Now Carney is promising that the Bank "will not take risks with this recovery", suggesting that rates won't move until that spare capacity has been used up.
Carney & MPC abandon simple forward guidance on interest rates, & introduce the kind of complex guidance that gives work to economists
— Robert Peston (@Peston) February 12, 2014