Bank of England Governor Mark Carney Friday signaled that rising productivity will now be the key factor that decides when the central bank will start to tighten monetary policy, and any tightening will be a slow, gradual process.
In a speech at the World Economic Forum in Davos, Carney effectively confirmed that the Forward Guidance the bank had previously given is no longer relevant after unemployment fell far faster than the central bank anticipated when the policy was introduced in August. He signaled that interest rate rises were still some way off because the rise in numbers in work wasn't being matched by increased productivity.
"It now seems likely that the rate of unemployment consistent with stable inflation in the medium term is somewhat lower than the (monetary policy committee) assessed back in August," the Governor told the Davos CBI British Business Leaders lunch.
Carney said he believes that factors including progress in the banking sector, the potential for skilled workers to return to higher-productivity jobs, and anticipated economies of scale, will boost productivity as the recovery continues, but he cautioned that the recovery will need to be sustained for longer if productivity is to grow "in earnest".
"Even though unemployment is falling faster than expected, the recovery has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy," Carney said.
The Bank of England policy setters will adapt its Forward Guidance to "changing circumstances" in its February Inflation Report, the governor added.
"The MPC will consider a range of options to update our guidance, recognising both what we have learned about the behaviour of aggregate supply in the economy as well as the more benign inflation outlook," Carney said.
By Steve McGrath; steve.mcgrath@alliancenews.com
Supplied by Alliance News
