to say that none of them yet seems to provide a completely convincing explanation. and although different mpc members place different weights on the possible explanations, we all agree that there is considerable uncertainty as to how productivity will evolve as the recovery proceeds. unemployment is certainly not a perfect guide to slack in the labour market. for instance, the recent increase in the number of workers wanting to work more hours suggests it understates the absolute level of slack1. but it is not unreasonable to expect this margin of “ potential hours worked ” to move in line with unemployment. and, unlike in the 1980s, we have not seen a substantial movement in the labour force participation rate, which suggests that the number of discouraged workers has not risen markedly. so overall, changes in the unemployment rate are, we think, likely to provide a reasonable guide to the evolution of labour market slack. now consider what will happen if the weak productivity performance of recent years is simply a consequence of the weak state of demand and so reverses as the recovery proceeds. in that case, businesses will be able to supply the extra demand without greatly expanding their workforces and unemployment will be slow to fall. in these circumstances, it is indeed appropriate to keep monetary policy loose as potential output is well above actual output. conversely, suppose that the financial crisis and subsequent recession has wrought lasting damage to productivity. in that case, unemployment is likely to fall faster as demand grows, meaning that unemployment will reach the 7 % threshold sooner. then it will be appropriate to tighten policy sooner in this case, as potential output will be lower. the only case where the linkage of policy to unemployment is potentially problematic is where there is scope for productivity to increase as demand recovers, but for some reason firms take on extra labour before the increase in productivity takes place. but this seems rather unlikely to me. in any case, it is important to realise that the 7 % threshold does not constitute a trigger for the mpc to raise bank rate. rather it represents a prompt for the committee to undertake a see bell, d n f and blanchflower, d g ( 2013 ) ‘ underemployment in the uk revisited ’, national institute economic review, no. 224. bis central bankers ’ speeches broad assessment of the prospects for demand, supply and inflation. if it appears that there is still a substantial degree of slack in the economy which can be absorbed without threatening the achievement of the 2 % inflation target in the medium term, then there will be

to potential. a period of strong ( weak ) growth could then be expected to lead to excess demand ( supply ) and a tendency for inflation to move above ( below ) the target. consequently it was quite rational for market participants to expect the mpc to increase ( reduce ) bank rate. but things are different now, as there is potentially a substantial margin of economic slack that needs to be absorbed. in that case, the steepening in the short end of the yield curve ought to be far less pronounced. fortunately, that is exactly what we see in the most recent data. the curve has steepened alongside the sharp increase in the pmi, but by far less than similar episodes of rising growth in the past would suggest. this too may be an indication that the guidance has had some effect in preventing unwarranted movements bis central bankers ’ speeches at the short end of the yield curve2. i am sure, however, that there is scope for much more analysis of the impact of our guidance on the behaviour of market interest rates and, indeed, on the broader economy. that guidance is, of course, qualified by three overrides or “ knockouts ”. two of these relate to the risks to price stability. one of these stipulates that our own projection for inflation 18 – 24 months ahead should be at least as likely to fall below 2. 5 % as to be above it. the other asks whether there is any evidence that measures of the inflation expectations of households, businesses and market participants have become insufficiently well - anchored to the target. at this stage, we do not see anything to worry about on this score. the third override condition, delegated to the bank ’ s financial policy committee, relates to whether the monetary policy stance is resulting in the build - up of dangerous financial stability risks. if the fpc cannot contain these risks using the range of recommendations and powers at its disposal, then it will alert the mpc, who will then decide whether an increase in bank rate is called for. increasingly noisy commentary that a new housing bubble is brewing – and concerns that the second stage of the help to buy scheme will add fuel to the fire – may mean that this condition becomes material. i do not have time left today to do justice to this issue. but it is important to remember that mortgage approvals for house purchase are still running at a little over half their pre - crisis average and, outside london, house price inflation is still quite modest.