The chief economist at the Bank of England has emphasised the risks around the central bank’s economic forecasts as he warned that the UK labour market remains tight.
At a speech in Warwick, published yesterday (February 16), Huw Pill said it is difficult to predict shocks to the economy, which is why the monetary policy committee focuses on the skews and risks around its projection for the economy as much as the prediction itself.
This ‘risk management’ has been at the heart of how central banks have managed policy recently, he said.
“[This] continues to influence thinking now, given concerns that so-called second round effects in price, wage and cost setting behaviour could create a self-sustaining momentum in inflation that persists even after the initial inflationary impulse from higher energy prices recedes,” he added.
Inflation dropped to 10.1 per cent in January, its lowest level in six months, however Pill warned that the labour market remains extremely tight.
The ratio of vacancies to unemployment in the UK, which the bank focuses on as an indicator of the health of the market, fell to 0.9, from a peak of 1.1 in August.
“That chimes with recent intelligence from our network of agents and their corporate contacts across the country, which points to some easing in recruitment difficulties,” he said.
However, the labour market remains tight relative to normal, which Pill said is consistent with wages in the UK rising.
Pill highlighted the delayed impact monetary policy has on the economy.
“Monetary policy works with ‘long and variable lags’...As a result, much of the policy tightening announced by the MPC over the past year still has to work its way through to the economy in general,” he said.
This means the MPC has to look as far forward as possible in order to try and understand inflationary pressures.
“The MPC needs to calibrate its monetary policy actions such that they have the appropriate impact on inflation as the lags in transmission unwind.
“In doing so, the MPC must recognise and quantify how much of the effect of its previous policy decisions still has to come through.”
sally.hickey@ft.com
