minouche shafik : treading carefully speech by ms minouche shafik, deputy governor for markets and banking of the bank of england, at the institute of directors, london, 14 december 2015. * * * i would especially like to thank grellan mcgrath for his help with the analysis and evidence in this speech. comments from alex haberis, andrew hauser, gareth ramsay, jon relleen, matt waldron, martin weale and james talbot are also gratefully acknowledged. introduction in what is likely a first for a monetary policymaker, i would like to begin my speech today with a chart of the depth of tread on car tyres – as measured by the busiest tyre fitting station in the uk whom i recently visited in the south east. generally speaking, the deeper the grooves are on a tyre, the better is its grip, performance and safety. when the recession hit in 2008, people began to delay replacing their tyres, implicitly accepting a deterioration in quality in the hope of saving on costs ( chart 1 ). what is surprising, however, is that although we are now into the seventh year of the recovery, the frequency with which drivers replace their tyres has not returned to pre - crisis levels. this illustrates quite nicely that although the economy is thankfully returning to normal, we cannot blithely assume that relationships which held in the past will automatically revert. several stylised facts in macroeconomics – such as the idea that deeper recessions are followed by stronger recoveries, and the idea that productivity can be relied upon to increase over time around a long - standing trend – have been long since disproven by the nature of the recovery in the uk. and questions remain about the how the economy operates in the wake of the great recession that make the setting of monetary policy more challenging. in the rest of this speech i would like to put forward some thoughts on how one should approach decision taking in the face of such uncertainty. i will highlight three themes : proceeding with caution, considering all of the outcomes and retaining flexibility. i do so as a member of the monetary policy committee, though you should note that what follows are my own views and may not necessarily represent the views of the committee as a whole. i don ’ t think other members place quite so much weight on tyre tread depth as an indicator, and they probably wouldn ’ t thank me were it to be deemed a bellweather for interest rate decisions in the future.

occurred during 2013. since then, the support to the level of activity from asset purchases has likely been waning. at the same time, the value of the £375bn stock of purchased assets has declined relative to nominal gdp ( from 22. 5 % to 20. 1 % ) as the latter has increased. over the period 1971 to 2008 the correlation between unemployment and inflation was – 0. 2. as best we can tell around ½ percentage point. bis central bankers ’ speeches seemed slow to pick up. the early signs were that 2015 would be more promising, but the rate of wage growth seems to have levelled off again in the most recent data. wage data can be volatile in the short run, and this recent pause may prove to be more noise than signal. but there are several plausible explanations for why wage growth might have levelled off more recently. • the first is quite simply that the number of hours worked per person per week has levelled off in the most recent data, and even started to decline. this could have a temporary flattening effect on the growth rate of wages earned per week. • the second is the nature of the growth in employment that we have seen. it has been unusually skewed towards employees with less experience and educational attainment and in occupations that tend to attract lower levels of pay. these compositional effects tend to push down on starting salaries, though that shouldn ’ t affect future wage growth prospects. • a third explanation, and one we hear from the bank ’ s network of agents, is that the low level of headline inflation may be limiting upward pressure on pay in some cases as relatively small nominal pay awards are sufficient to increase real incomes. if this is an important factor, the lags between headline inflation and the determination of pay awards mean it could increase the persistence of weak wage growth for some time to come. this too should ultimately fade as the effects of energy and the exchange rate on inflation dissipate. • a fourth potential explanation is that the severity of the recession and the increase in uncertainty that accompanied it has had a lasting impact on the decisions people take and the tradeoffs they make – just as it seems to have done in the market for tyres. it may be, for example, that with the recession still reasonably fresh in their memories, workers are marginally more reluctant to push for the kinds of pay settlements they would have been used to before 2008, or marginally less willing to take the step of switching employers in order