From the TUC

Inflation Report – First Thoughts

07 Aug 2013, by Guest in Economics

  1. It’s certainly welcome that the Bank has now adopted (with caveats) a target for unemployment. Whilst no one thinks 7% is an acceptable level of unemployment (and 7% is higher than I thought they’d go for to be honest) the Bank is surely right to take employment as well as inflation into account in setting monetary policy.
  2. The Bank is now more optimistic on growth but the overall tone of the press conference and Inflation Report was that of Carney pouring a large bucket of much needed cold water on the ‘Boom Britain’ headlines of yesterday.
  3. The Bank expects unemployment to remain above 7% into 2016. That both implies record low interest rates for this entire Parliament but also suggests a seriously weak labour market despite economic growth. This has worrying implications for living standards.
  4. The Bank expects regular pay growth to be around 1% in 2013 implying further falls in real wages.
  5. Interestingly the Bank notes that the cut in the 50p rate of tax has probably impacted the pay figures in the first half of this year – with some people deferring bonus payments to take advantage of the cut.
  6. The new Governor seems more relaxed about Help to Buy than his predecessor and isn’t worried about a house price bubble anytime soon.
  7. The Bank notes that real incomes in Q1 2013 were still below their pre-recession peak. It also notes that at this point in the 1990s recovery they were 12% above the previous peak.
  8. The Bank notes that any pick in productivity growth might have an impact on employment. There seems to be a range of views on the causes of poor productivity growth across the MPC.
  9. The Bank also notes that fiscal consolidation has been a drag on growth and this is likely to continue.
  10. Will this forward guidance have any impact? Possibly, I would expect bank lending rates to tick down in the near future given the clear picture about base rate out to 2016.