Investors who think the U.K. economy is almost ready for higher rates have not got the message from Mark Carney. The Bank of England’s governor does not think that a strong housing market and falling unemployment make the country slack-free and primed for higher inflation. Mr. Carney is taking his chances, but for now he is probably right to try to delay a rate rise.
Mr. Carney gave his latest prognosis in Wednesday’s press conference for the central bank’s much-watched quarterly inflation report. He batted off suggestions that monetary policy was the right tool for dealing with what looks increasingly like a house price bubble, especially in London. That, he said, is for the June meeting of the Financial Policy Committee. Nor was he very impressed by the rise in jobs and the fall in the unemployment rate to 6.8 per cent.
Rather, Mr. Carney is interested in slack, or what professionals call the output gap. As long as there is enough of this “fuzzy concept,” as Charlie Bean, the outgoing deputy governor, called it, workers cannot get inflationary wage increases and producers struggle to raise prices. The Monetary Policy Committee thinks the output gap is 1 to 1.5 per cent of GDP.
For the MPC, the economy is far from robust. GDP is still below the pre-crisis peak. Self-employment, much of it probably undesired, accounts for more than half of the new jobs in the past year. And the annual growth rate in regular pay is just 1.3 per cent – below the 1.6 per cent inflation rate. Also, the combination of rising GDP and falling exports suggests the sort of unbalanced economy that could tip back easily, especially if rates are raised.
Still, the Bank of England’s approach is risky. Most notably, the FPC may not be able to curb house price gains. But for now, it looks right to be more concerned with the flat economy than with the London bubbly. If the central bank isn’t completely wrong about economic slack, U.K. rates could stay where they are longer than investors expect.
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