It's never a great sign when a central bank governor says his country's predicament is a “pretty sad story.” That's how Bank of England Governor Andrew Bailey described the UK at the Federal Reserve symposium in Jackson Hole, Wyoming, last week. He said weak productivity and poor labor participation present an "acute challenge" for raising potential growth. This is well-trodden ground among economists, but from the central bank head it comes very close to criticizing the government. There has been a noticeable chill recently in communications that could be considered blame-shifting.
One might see these comments as a precursor for announcing interest-rate cuts or even stopping quantitative tightening. But that’s now how the BOE rolls; in fact, by muddying the waters Bailey was aiming for quite the opposite — to buy yet more time to maintain the highest benchmark rate in the Group of Seven to see how economic indicators pan out. If inflation is genuinely heading much higher or too close to prevailing gilt yields then it's the BOE's clear duty to act.
Despite widespread problems with the quality of the Office for National Statistics data, notably on the labor market, Bailey is drawing some pretty firm conclusions where it suits him. Almost in the same breath, he contradicts his own analysis by querying whether the problem may be overstated — “it is also possible that those who are not participating in the economy are participating more in completing the labor force survey.”
Riddle me another obfuscating paradox. Evidently, he sees fiscal policy bearing the responsibility for sorting any of this out and not his monetary toolbox. Independence in central banking is a noble concept but it does need to be seen to be doing a good job.
Bailey has frequently mentioned his fear the UK economy has a "speed limit," although he fails to specify such a nebulous concept. Nonetheless, the impression is that the 1.3% growth rate Bloomberg Economics expects for this year is pushing up on that boundary. Rather than wave an interest-rate easing carrot to boost growth as tariffs and prospective tax rises cloud the economic horizon, he prefers to wield a metaphorical stick warning of potential inflationary triggers. Meanwhile, the Resolution Foundation expects UK unemployment to reach 5% in the August release, a sharp jump from June’s 4.7%.
