Bank of England admits mistake over labour market growth

Ben Broadbent, deputy governor of the Bank of England, has said the central bank’s recent focus on unemployment and wages has made it “harder to communicate publicly what matters for policy” and admitted “we were wrong” last year about the labour market.

In a speech at an annual gathering of central bankers in Jackson Hole, Wyoming, Mr Broadbent said the UK’s puzzling collapse in productivity had made it necessary for the BoE to look to the labour market for signs of how much “spare capacity” there was to generate growth without inflation.

“The output data are no longer sufficient statistics for inflationary pressure: even if you have to wait awhile to see them, movements in unemployment become important too,” he said. “Indeed …if labour supply can also vary, you need to consider the wage numbers too.”

But he acknowledged this shift in focus was not “costless”: “It makes it harder to communicate publicly what matters for policy,” he said. “But that is a fact of life.”

He also said that – because labour markets can react slowly – there was now a trade-off between the “accuracy of the information about inflationary pressure and its timeliness.”

His comments come as both the BoE and the US Federal Reserve try to navigate their way from ultra-loose monetary policy back to normality amid deep uncertainty about how the 2008-09 financial crisis has affected their respective economies.

Investors in the UK have complained about conflicting signals from the BoE about how soon interest rates might start to rise from their record low of 0.5 per cent.

Last year, the BoE said rates would stay on hold at least until unemployment fell to 7 per cent – something it predicted would take more than two years.

“We were wrong,” Mr Broadbent acknowledged on Saturday. “Employment grew significantly faster than we’d expected and, despite material rises in participation, unemployment reached 7 per cent only eight months later.”

In June this year, Mark Carney, the BoE governor, warned the first hike “could happen sooner than markets currently expect”. But last week he said the Monetary Policy Committee would put “particular importance” on wage growth, which had been very low.

Mr Broadbent said on Saturday that wage growth in the UK been much weaker than the BoE had expected. While some of this weakness could be unwound later this year, he said, it was also possible that wage growth had adjusted to “a protracted period of low productivity growth”.

“If this were true, then the upturn in the UK would indeed have been accompanied by an expansion of supply, as anticipated a year ago; it’s just that it’s the effective supply of labour that’s risen, not labour productivity.”

Mr Broadbent concluded it would be “nice to live in a simple, stationary world, in which unchanging objectives meant unchanging operational rules for policy …In the meantime, we have little option but to say what central bankers have always said, that meeting the inflation target depends on a “range of indicators”.”

His comments came a day after Janet Yellen, the Fed chair, made a similar point in a speech at Jackson Hole. She said monetary policy “ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model”.