What's going on?
Speech given by
Dave Ramsden, Deputy Governor for Markets and Banking, Bank of England
Barclays Inflation Conference, London
7 June 2018
I am grateful to William Abel, Harvey Daniell, Bianca Ginelli Nardi, Raf Kinston, Simon Kirby,
Elliot Luciani-Kane, Rebecca Maule, Sanjay Odedra, Tom Smith, Pawel Smietanka and
Brad Speigner for their assistance in preparing this speech, and Clare Macallan, Michael Saunders
and other Bank staff for their helpful comments and suggestions.
An unusual position
UK GDP growth has slowed following the Brexit referendum, and it slowed even more in the first quarter of
this year. In the MPC's May Inflation Report we are forecasting that it will remain subdued over the forecast
period. If our forecast materialises, annual growth will have been between 11⁄4 and 2% for five consecutive
years from 2016 to 2020. To give some context, annual average GDP growth has been in this range in only
eight of the 50 years before that period, and three of those were since the financial crisis.
It's been said before but it bears repeating: the UK economy is in an unusual position.
Over the past few years, meanwhile, unemployment has fallen from a high of 8.5% to a forty year low of just
4.2%. Employment has similarly picked up to record highs. Usually you would expect faster growth to be
accompanied by stronger employment growth, and vice versa (Chart 1) - an empirical fact so robust that
economists know it as Okun's Law.1
Since the financial crisis, however, this law has, if not broken down, at
least started working rather differently than before. Unemployment has fallen far more, and employment
growth has been far stronger, than might have been expected given the subdued pace of GDP growth
(Chart 2).
Chart 1: GDP and employment growth
12
Per cent
Four quarter employment growth
10 Four quarter GDP growth
8
6
4
2
0
-2
-4
-6
-8
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
1
Okun, Arthur M. "Potential GNP, its measurement and significance". Cowles Foundation, Yale University, 1962
Chart 2: Okun's Law and the financial crisis
4 Change in
1971-2010
unemployment
3 2011-2018
2
1
0
-6 -4 -2 0 2 4 6 8 10
-1
-2
-3
-4
Arithmetically this is accounted for by a fall in the rate of labour productivity growth. Having grown steadily for
a number of decades, the level of productivity fell sharply following the financial crisis. That was in line with
historical experience.2 What there is much less historical precedence for is the failure of productivity growth
- -
to recover to its pre-crisis growth rate. A cottage industry of economists including me have tried to
explain the so-called productivity puzzle.3
2
Carmen Reinhart and Kenneth Rogoff (2009), "This Time is Different: Eight Centuries of Financial Folly". Princeton University Press
3
Ramsden, D. "The UK's productivity growth challenge", speech at
I set out my views in more detail in a speech in February. See:
-
Babraham Hall, Cambridge, 23 February 2018. Many other members of the MPC have also given their attention to the question see
for example: Tenreyro, S., "The fall in productivity growth: causes and implications", speech at Queen Mary University of London,
15 January 2018; Haldane, A. G., "Productivity puzzles", speech at the London School of Economics, 20 March 2017.
Chart 3: The productivity (growth) puzzle
140
Index:
2008Q1 = 100
120
100
80
Labour productivity
60
Log-linear trend
40
20
0
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
Finally, with unemployment falling to near-record lows, and spare capacity being rapidly eroded, you might
expect wage growth to have picked up at a similar pace. The existence of a wage Phillips Curve, its stability,
its slope and its identifiability in the data are collectively one of the more contentious subject areas in
-
economics and for some of you my next chart (Chart 4) may not do much to persuade you of any of these.
Nevertheless I think most practising economic policymakers would expect to see at least some link between
falling unemployment and rising wages.4 Indeed one reason for the fall in the curve over time is arguably
policymakers' success at using that link to control inflation and bring down nominal wage expectations. At
-
any rate, the stubborn failure of wage growth to rise much above 2% - that is, above half its pre-crisis rate
and workers' surprising willingness to absorb that in real wages represents one more surprising feature of
the British economy.
4
The original observation was made in: Phillips, A. W. (1958). "The Relationship between Unemployment and the Rate of Change of
Money Wages in the United Kingdom 1861-1957". Economica, 25 (100): 283-299. For more recent MPC discussion, see: Tenreyro, S
(2018). "Models in macroeconomics", speech at the University of Surrey, 4 June 2018; Vlieghe, G (2018), "From asymmetry to
symmetry: changing risks to the economic outlook", speech at the Confederation of British Industry, Birmingham, 23 March
2018;
Broadbent, B (2017), "Brexit and interest rates", speech at the London School of
Economics, 15 November 2017; Cunliffe, J (2017).
"The Phillips curve: lower, flatter or in hiding?", speech at the Oxford Economics Society, 14 November 2017.
Chart 4: The wage Phillips Curve
Wage growth (per cent)
1971-1997
35
1998-2012
30
2013-2017
25
20
15
10
5
0
-5
3 5 7 9 11
Unemployment (per cent)
I want to use my speech today to focus on the implications of the UK's unusual economic position for
inflation and for monetary policy, both in terms of what has happened over the recent past and of what I
expect to happen in future. I will focus on three aspects of the economy in particular. First, the ongoing
consequences of the vote to leave the EU, and what those have meant and could mean in future for
monetary policy. Second, the continued evolution of the labour market and how I expect that to affect
inflation and monetary policy in future. And third, developments in the economy at the start of this year: the
unexpected weakness of GDP and evolution of inflation.
These aspects of the economy are unusual in terms of what they imply for the UK outlook. But as a
policymaker I feel reasonably confident, even with the uncertainties, that, together with my colleagues on the
MPC, I have a reasonable understanding of what's going on, and in particular what the implications are for
inflation. Let me explain why in more detail, and then conclude with where that leaves my policy thinking.
The Brexit vote
Turning first to Brexit.
The vote to leave the EU leaves the UK in a position which is not just unusual but unique. As my colleague
the Governor said recently, the Brexit negotiations are the biggest challenge as well as the biggest
opportunity facing the country at this moment. And the outcome of those negotiations remains the most
significant influence on the economic outlook, as well as the greatest source of uncertainty about the future.
As a member of the MPC, my task in the face of this uncertainty is to balance any trade-off between the
speed at which inflation returns sustainably to target and supporting employment and activity, in line with our
remit from the Government, as the UK economy transitions to whatever end state results from those
negotiations.
What does that mean in practice?
In the MPC's assessment, consistently held since before the referendum, Brexit is affecting the UK economy
-
via three main channels that is, through its effects on supply, demand and the exchange rate.
On the supply side we expect Brexit to have both a long and a short run effect on productivity.
The long run effect comes about through the effects on the UK's
openness.5 We know that on average being
more open to trade makes an economy more productive. That comes about through a range of channels. For
example, greater competition encourages UK firms to operate more efficiently. Access to larger export
markets enables them to take more advantage of economies of scale. And the ability to trade allows the UK
to specialise in sectors where it has a competitive advantage. To the extent that leaving the single market or
EU, that will reduce the economy's productive
the customs union makes it harder to do business with the
capacity. (Equally if leaving the EU allows the other economies to trade with and invest more openly in the
UK then these same channels are likely to support UK productivity). We don't know whether these long-run
channels are already in operation. But it is possible that they have been contributing to reinforce the
continued weakness of productivity growth.6
In the short run what we do know is that uncertainty about the eventual outcome of the Brexit negotiations,
and perhaps the expectation that Brexit will lower economic growth over time, has been depressing business
investment. Businesses are waiting for more clarity before embarking on new capital projects, and that
reduces their productive capacity relative to what it could have been, as well as hampering resource
re-allocation across the economy.
We see this most clearly in business surveys. Brexit has consistently ranked at or near the top of the list of
In the Bank's own quarterly Decision
the risks identified in the Deloitte survey of Chief Financial Officers.7
Makers' Panel, around 40% of firms consistently identify Brexit as a major source of uncertainty, with less
than 20% viewing it as unimportant (Chart 5). Bank staff analysis of the results points to a drag of between
3 and 4% on nominal investment growth since the referendum as a result of this uncertainty8.
5
For more detail on these mechanisms, see the Box on "Factors affecting the prospects for
long-term supply following the EU
referendum" on pages
29-30 of the August Inflation Report.
6
It is also possible that actual or anticipated changes in institutional arrangements due to Brexit might affect the outlook for net
migration and therefore population growth.
7
Specifically, it has been at the top of the list for two years, falling back for the first time to second place in Q1, with its place at the top
taken by weak UK demand.
8
"Tracking the views of British businesses: evidence
For more information on the Decision Maker Panel, see Bloom, N. et al (2017),
from the Decision Maker Panel", Bank of England Quarterly Bulletin, 2017Q2. The Bank's 2018Q1 Agents' Summary of Business
Conditions includes the latest published results from the survey.
Chart 5: Brexit as a source of uncertainty9
Aug-Sep 2016
Share of respondents (per cent)
Feb-Apr 2017
50
Aug-Oct 2017
Feb-Apr 2018
40
30
20
10
0
Not important One of many sources 2 or 3 top sources Top source of
uncertainty
On the demand side, while Brexit did not lead to an immediate fall in GDP, it is nonetheless exerting a drag.
In addition to its effects on investment, it has had a significant impact on real household incomes and
therefore on consumption. The main vehicle for this impact has been the fall in the exchange rate, which
peak. The rise in import prices caused by sterling's
remains some 15% below its pre-referendum
depreciation has had a material and persistent effect on incomes: real household income has only risen by
0.2% in the seven quarters since the referendum, compared with averaged growth of over 11⁄2 % per year in
the five years prior to it (Chart 6).
Given that slowing in real income growth, you could argue that it's surprising that households haven't
adjusted consumption even more. Consumption growth has certainly slowed: it has averaged around 0.3%
per quarter since the referendum, compared to 0.6% in the previous five years and nearly 0.9% in the
-
pre-crisis decade. But households have also in aggregate reduced their savings the household saving rate
has fallen by some two per cent of income (Chart 7). Whether households will maintain that lower rate of
saving, as in the MPC's central forecast, remains to be seen -
there must be a risk that consumption could
adjust further.
9
Question: "How much has the result of the EU referendum affected the level of uncertainty affecting your business?"
Chart 6: Consumption and income growth
Per cent
Referendum
3
2
1
0
-1
Quarterly consumption growth
-2
Quarterly household income growth
Dashed lines represent averages over the period
-3
2000 2004 2008 2012 2016
Chart 7: Household saving rate
Per cent of income Referendum
12
10
8
6
4
2
0
2000 2004 2008 2012 2016
Why didn't demand fall further following the referendum? One reason is that the fall in the exchange rate,
while dampening consumption, will also have supported net trade. Another is the policy actions that were
taken in response.10 In addition, demand has been helped by an unexpectedly strong global recovery, which
will have boosted trade and investment, as well as by more supportive financial conditions, particularly
10
The MPC's policy package in August 2016 -
which consisted of a cut in Bank Rate, the introduction of the Term Funding Scheme to
ensure that that cut was passed through, and an additional £60bn of asset purchases including corporate bonds - will have provided
stimulus, as will the mild loosening in the fiscal stance in the subsequent Budget. In addition, the FPC amended the leverage ratio
capital buffer to zero, and emphasised that banks'
framework for UK banks by excluding central bank reserves, cut the counter-cyclical
liquidity reserves are usable, while the PRA Board decided to use regulatory flexibilities to smooth insurers' transition to
new regulatory
standards in a very low interest rate environment.
intense competition in mortgage markets, which will have helped offset some of the effects on consumption
of the fall in income.11
Finally, the third channel through which Brexit is affecting the UK economy is through its effect on the
exchange rate. I have already discussed its effects of the recent depreciation on demand, where it has
contributed to a rotation away from consumption and towards net trade. Equally important for the MPC has
been its effect on inflation.
to remind an inflation conference that CPI inflation has overshot the MPC's 2% target for over a
I hardly need
year now, peaking at 3.1% last autumn. That overshoot has almost entirely reflected the effects of the
depreciation. UK non-fuel import prices have risen 7% since the referendum, a direct result of the lower
exchange rate. If anything that is a little less than we had been expecting based on past experience, and we
revised down our inflation forecast slightly in the last Inflation Report to reflect that. But it has nevertheless
been enough to generate a significant overshoot.
Why did the MPC not act to prevent that overshoot? After all, the Committee knew it was coming.
One reason is that the lags from raising Bank Rate and lowering inflation are long enough that we would
have been unlikely to be able to offset the full effect of import prices. But a more substantive reason is that
we were faced with a trade-off between growth and inflation.
The MPC's remit gives us two very clear objectives. The first objective, is "to maintain price stability", defined
as an inflation target of 2%. Importantly that target is symmetric: there is no bias towards keeping inflation
above or below the target. The second objective is "to support" - - "the
subject to the first economic policy of
Her Majesty's Government, including its objectives for growth and employment".
Economic situations like the one the UK has been in create a conflict between these two objectives.
Monetary policy can reduce inflation, but only at the cost of reducing output and increasing unemployment. If
inflation is above target and output is below potential (or vice versa), there is a fundamental trade-off
between achieving the two objectives. Since 2013 the MPC's remit has required us to manage significant
trade-offs when exceptional circumstances cause them to arise. And that has been the basis for the
Committee's assessment of the UK situation since the referendum.12
To explain how our position on this has evolved, let me turn to the second unusual aspect of the economy
that I want to focus on this afternoon: the UK labour market.
11
For more details see Box 5, "How has the economy evolved relative to the February 2017 Report", in the Prospects for
Inflation
section of the May 2018 Inflation Report.
12
see: Carney, M (2017), "Lambda", speech at the London School of Economics, 16 January 2017.
For a detailed explanation
The labour market
I said at the start of this speech that wage growth has been surprisingly weak. That wasn't a figure of
shows the MPC's wage
speech. This chart (Chart 8) growth forecasts from the past few years against the
actual data. As you can see, the MPC have been consistently surprised by the continued weakness of wage
growth.
Chart 8: MPC wage forecasts
5 Total pay growth, per cent
4
3
2
February 2014 February 2015
1
February 2016 February 2017
February 2018 May 2018
0
-1
2012 2013 2014 2015 2016 2017 2018
Why have wages been so persistently weak?
One reason is weak productivity growth. How much companies are prepared to pay their workers depends
ultimately on how much those workers are able to produce. Weaker productivity has meant weaker wage
growth.
But wages were weak even relative to productivity. Statistical models that take account of the effects of slack
and productivity struggled to explain the full extent of the weakness in wages. "Missing wage inflation" and
the question of whether the Phillips curve was dead became a hot topic among economists. As with the
productivity puzzle itself, there are a wide range of candidate explanations for this "wage puzzle". I won't go
through the full list now. But I do just want to mention three that I find relevant.
One candidate explanation is that there may be lags between unemployment falling and wage growth
starting to pick up. That might be the case for instance if wage expectations take time to adjust to a tighter
labour market - any lasting effect of the post-crisis downward nominal wage rigidity should have worn off, but
could re-emerge if 2% wage inflation has become accepted as more typical following the financial crisis. Or it
might be that pay initially only rises for workers moving jobs, and that pay for workers staying in the same job
doesn't pick up until the stock of unemployment workers is used up. That would be consistent the fact that
pay growth for "switchers" has recovered by much more than pay growth for "stayers"
(Chart 9). In the more
recent period it might be that this is another effect of Brexit: as I argued last autumn, workers might have
responded to uncertainties about the outlook by showing even more flexibility in their wage demands, or
employers might be acting in a more precautionary way.
Chart 9: Pay growth for "switchers" and "stayers"
Median pay rise, per cent
12
Workers moving jobs
10
Workers staying in jobs
8
6
4
2
0
2001 2003 2005 2007 2009 2011 2013 2015 2017
This chart contains statistical data from ONS which is Crown Copyright. The use of the ONS statistical data in
this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the
statistical data. This work uses research datasets which may not exactly reproduce National Statistics
aggregates.
A second explanation would be if technological or other developments have reduced individual workers'
bargaining power. This would be a continuation of a long run trend rather than a development specific to the
financial crisis. It would be consistent with those studies which find a longer-term flattening of the Phillips
Curve that predates the crisis. But it might have intensified with the "Uberisation" of, and other influences
on,
the UK labour market, which may have left workers more atomised. Greater contestability across
international labour markets and the greater integration of the global labour pool would also fall into this
category.13
Finally, a third explanation would be that headline unemployment might be understating the amount of slack
left in the labour market. At the same time as actual unemployment has been falling, there have been a
number of structural changes in the labour market that are likely to have shifted the equilibrium
13
For more detail, see: Carney, M (2017), "[De]Globalisation and inflation", 2017 IMF Michel Camdessus Central Banking Lecture,
18
September 2017.
unemployment rate. For example, higher educational attainment, increased use of online job advertising, and
increased flexibility in the labour market are likely to have increased matching efficiency and lowered job
destruction rates. That would have been consistent with the fact that broader measures of domestically
generated inflation also remained below levels that would be consistent with inflation at target in the medium
term.
The idea that there was more slack than headline measures of unemployment were suggesting was one that
-
I put particular weight on when I started on the MPC last autumn in other words that there was more room
for the economy to grow without generating inflation above target in the medium term. That was one reason
why I voted (in the minority) for no change at the November policy meeting.14 During the MPC's annual
supply stocktake in February we made a judgement to revise our estimate of the economy's equilibrium
unemployment rate from 41⁄2% to 41⁄4%: in other words, a judgement that there was indeed some more slack
in the labour market. That left me more comfortable with the balance of risks around the MPC's central
assumptions than I had been previously.
At the same time, by the February Inflation Report, annual wage growth in the data had picked up materially
relative to what we had been expecting at the November meeting. In November the most recent observation
for whole economy regular pay had been of just 2.1% growth (in August). And we were forecasting it to only
pick up very slightly over the next six months. But by the February Report it had picked up to 2.4% growth (in
November) and we were forecasting a further pick-up to 2.8% over the next few months. That was
corroborated by our Agents' pay survey which was
pointing to a 1⁄2 percentage point increase in settlements
this year, from around 21⁄2% to around 3%, with the ability to recruit and retain staff the number one factor
driving growth.
Since February the picture has remained the same. Wages did indeed pick up to 2.8% by the May Inflation
report. And the very latest observation, of 2.9% regular pay growth in March, was slightly higher than our
expectation even in May. Wage growth has now been rising steadily over the past six months, and unit
labour costs have been rising towards growth rates consistent with overall inflation at target. The period of
unusually subdued growth in wages appears to be coming to an end.
The year so far
-
That brings me to the third unusual situation that that we have had to contend with developments in the
economy so far this year, and how the MPC have responded to them - most recently at our May policy
meeting. At the time of the February report we judged that the trade-off between managing slack and
diminished. We went so far as to say that "were the economy to evolve broadly
controlling inflation was much
in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat
14
(2017), "Monetary Policy from End to End: Define, Decide, Deliver", speech at King's College London, 20
See: Ramsden, D
November 2017.
earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the
November Report". Given that, why didn't we vote in May to raise Bank Rate?
The key thing to note here is the dependence on the data. Did the economy evolve broadly in line with our
February projections?
The simple answer to that question is no. Instead from early April we were faced with a string of much less
encouraging data for the early part of the year. The March PMIs fell sharply and only partially reversed in
April. Inflation surprised on the downside. GDP growth in Q1 was 0.1%. Consumer confidence fell. And
consumer credit growth slowed sharply in March.
Of course as always with data, there were more layers to the story. Most importantly, our staff analysis
suggested the low GDP growth figure was likely to be heavily influenced by the bad weather we had in
March. That was partly because the weather is likely to have had a dampening effect on activity - and the
pattern of activity was consistent with this. And partly because GDP is typically revised up more than usual
after periods of heavy snow: this chart (Chart 10) illustrates the size of revisions in previous periods of snow.
From an economic perspective it was also hard to find other factors that could have contributed to such a
sharp slowdown: the world economy had continued to grow, and financial conditions had remained
accommodative.
Chart 10: Snow effects on GDP revisions
Preliminary estimate Latest estimate
2009 Q4
2010 Q1
2010 Q4
2013 Q1
-0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8
Percentage changes on a quarter earlier
-
At the same time, the labour market continued to perform robustly. Employment continued to rise, which
-
given its correlation with GDP, which if anything has become more contemporaneous in recent years would
suggest all else equal that GDP was also growing. Underlying regular pay growth continued to pick up in line
with our forecasts.
Given all this, it seemed to me and to the MPC that the most likely explanation for the apparent weak data in
the run up to our May meeting was that it was a temporary, weather-related softening. And we continued to
see the trade-off between slack and inflation as much diminished. In fact last month as part of our continuing
efforts to make our thinking more transparent, we published our estimate of excess supply (or slack) in the
economy for the first time. If you look it up in the Report you will see that according to our estimate only a
- -
very small amount of excess supply 1⁄4% of GDP remained in the economy.
But we couldn't be certain of this. Even in the most benign
interpretation the economy had gone through a
temporary soft patch. The majority of indicators were pointing in one direction. And it felt like there was at
-
least a risk that, perhaps reflecting the unusual position of the UK, something more material was going on
perhaps one of the risks I highlighted earlier was crystallising. That was why I, along with the majority of the
Committee, decided to vote again to leave Bank Rate unchanged.
How do I see the economy evolving from here?
It is still early days. We are still only two thirds of the way through Q2, less far through the Q2 data cycle, and
only a month has passed since our last MPC meeting. Even so, the data we have had so far suggests our
interpretation of the slowdown in Q1 as temporary looks to be being borne out. Consumer confidence and
consumer credit both picked up in the latest data, as did retail sales and several business surveys. That
included the latest services PMI output balance, representing 80% of the economy. So far at least our May
judgement looks on track.
Looking ahead, my central expectation for the economy is in line with the MPC's best collective judgement
as expressed in our inflation report forecasts. Global growth still looks solid, albeit a bit less rosy than it did
before. The labour market is still robust. I expect GDP growth to resume at a steady but unspectacular pace
(Chart 11), and demand to continue to rotate away from consumption and towards trade and investment. Of
course all this is conditional on a smooth transition to the eventual post-Brexit arrangements.
Chart 11: May IR central GDP forecast
3.5 Per cent
3
2.5
2
1.5
1
0.5
0
-0.5
2013 2015 2017 2019 2021
Given our forecast for productivity growth, however, even this subdued pace of growth is enough to exceed
the new, lower economic speed limit, which we estimate to be around 11⁄2%. Unemployment falls to 4%,
below our estimate of equilibrium, and a small margin of excess demand opens up. And so we expect wage
growth and domestic inflationary pressures to continue the pickup we saw at the end of last year (Chart 12):
-
wage growth eventually picks up to 31⁄2% which given our productivity growth forecast implies unit wage
cost growth of 21⁄4%.
Chart 12: Measures of domestically generated inflation
Per cent
3.0
2017 Q3
2017 Q4
2.5
2.0
1.5
1.0
0.5
0.0
Services CPI Services PPI Unit labour Private sector Unit wage GVA deflator GDP deflator
costs ULCs costs excluding
government
This is an important thing to bear in mind when looking at the current wage data. Before the financial crisis
we were invariably in a "two plus two is four" world, with two per cent productivity growth and two per cent
inflation yielding four per cent wage growth at least. Today we seem to be in more of a "one plus two is
three" world: given one per cent productivity growth, wage growth only needs to reach three per cent, not
four, to be consistent with the two per cent target. In our central forecast wage growth achieves that. And so
from sterling's depreciation comes to an end,
although imported inflation falls back as the upward pressure
domestic cost pressures keep inflation close to target in the medium term.
Relative to this central forecast I can see risks in both directions. I have already mentioned the possibility that
consumption growth might take a further leg down as households continue to adjust to lower real incomes. In
that case GDP growth would be lower, spare capacity could open up and inflation could drop below target.
But there are also risks from the supply side. On the one hand, productivity growth has serially disappointed
and could continue to do so in future. In that case excess demand could build more quickly and inflation
could stay above target. That said, I am optimistic about the potential for Fintech and other new technologies
to lead to productivity gains, either directly or by driving competition, and in turn to potentially higher, and
non-inflationary, wage growth.15
One thing to emphasise about our central forecast is that it is conditional on the market yield curve. At the
time of the May Inflation Report that yield curve was pricing in roughly three rate rises over the three years
covered by our forecast. And those three rate rises were one of the forces preventing excess demand rising
faster in the forecast and inflation from remaining persistently above target.
To demonstrate what would happen without those rate rises, we also publish a version of the forecast in the
Inflation Report showing what would happen if Bank Rate remained unchanged (Chart 13). In that version of
the forecast inflation does not fall back to target. Instead excess demand and domestic cost pressures build
much more rapidly. And so inflation stays persistently at around 2.4%, little changed from where it is now and
materially above our inflation target.
15
- see: Ramsden, D (2018), "The Bank of England -
I set out my views on the opportunities presented by Fintech in a speech in March
to Fintech", speech at HMT's International Finance Conference, London, 22 March 2018.
Open
Chart 13: May IR central inflation forecast
Policy following market rates
Per cent
No change in Bank Rate
3.5
3
2.5
2
1.5
1
0.5
0
2013 2015 2017 2019 2021
-0.5
This does not seem a desirable outcome. Inflation persistently above target and a sustained period of excess
demand would represent a failure to meet our remit. This is one of the reasons why I signed up to the
Committee's collective judgement that "were
the economy to develop broadly in line with the May Inflation
Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to
return inflation sustainably to its target at a conventional horizon".
Despite the backdrop of uncertainty, and despite the unusual things going on in the economy, I am actually
reasonably confident about our understanding of what's going on. Forecasts are never going to be perfectly
accurate. But over the last year I think we have got the broad narrative, and our understanding of the key
moving parts, about right, with the slowing in GDP growth, the rotation of demand and the overshoot in
- -
inflation.16 Students of the UK labour market and I have been one for over thirty years should always
expect surprises. But I feel my knowledge of what's going on has developed over the last year. And, lastly,
while it is still early days, our judgements on the behaviour of the economy so far in 2018, and the effects of
the snow, appear to have been borne out.
Nevertheless, our view of the outlook and the prescription for monetary policy remains conditional on the
data, how t