Will Bank of England’s forward guidance work for the regions?

By | December 17, 2013

Paul Mackie

Paul Mackie

Guest blog by Paul Mackie, president of Bradford Chamber of Commerce – co-host of the Bradford University School of Management and Bank of England event with guest speaker, Dr Ben Broadbent of the Monetary Policy Committee

At what point will interest rates start to rise again?

This question is tied up with the Bank of England’s forward guidance which Mark Carney, Governor of the Bank of England announced on 7 August 2013, just a month after his appointment.

Across the world, governments are trying to balance economies as they come out of the recession.  In the case of the UK, forward guidance is really helpful – but the challenge is whether and to what extent should this take national or regional pictures into account?

First, what is forward guidance?  This is an extract from the Bank of England’s website

“… the Monetary Policy Committee has provided some explicit guidance regarding the future conduct of monetary policy. The MPC intends at a minimum to maintain the present highly stimulative stance of monetary policy until economic slack has been substantially reduced, provided this does not entail material risks to price stability or financial stability.

“In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%, [subject to the conditions]…”

Dr Ben Broadbent

Courtesy of Bank of England

In Bradford, we were recently delighted to host the visit of Dr Ben Broadbent, who sits on the Monetary Policy Committee:  he briefed us on the economy and listened to the views of local Bradford businesses.  With more than 70 businesses turning up for the breakfast meeting, this is clearly a topic still exercising business minds.

The event provided a lively discussion – and challenges – for the Bank of England and it raised a number of questions that I think will be important for our own region.

1. How do national and regional unemployment figures compare?

While the full version of the forward guidance has a number of caveats and provisos, the essence is that bank rates may well rise when unemployment falls to 7% (my thanks to the Bank of England for copies of some of their slides).

Slide-1-unemployment

My concern is the regional differences that make up a national statistic of “7% unemployment”.

The unemployment rate in Bradford is currently 10.5%.  Although slowly improving, this is a very different picture from last month’s announcement of ‘UK jobless falls to three year low of 7.6%’ and even our own Yorkshire and Humber region’s rate of 9.3%.

Clearly the national rate would be expected to reach 7% way ahead of Bradford reaching this unemployment figure.  If the threshold for an increase in rates were met then the squeeze in the Northern pockets would be felt much harder and the fall in living standards would increase.

It should be said this is not a North-South divide issue.  If you look at the BBC’s economy tracker for unemployment, there are patches of high unemployment across the UK and including in the South, even in some London boroughs.

Slide-2-market-interest-rat

We have other anomalies to consider (full data on Bradford Labour Market)

–        26% of  Bradford’s 16 to 64 year old population are ‘economically inactive’ – defined as not looking for, and unavailable for work.  This compares to 23% for Yorkshire and Humber and 22% for the UK

–        34% of benefit claimants (6,0000) have been doing so for more than a year in Bradford.  This has risen by 8% in the last 12 months, whereas nationally it fell by 8% – another worrying trend

–        The local youth claimant rate is also twice the national average – 10% for Bradford against 5% nationally.  Bradford’s youth population is also growing faster than in the rest of UK.

2. Could staggered increases in interest rates be helpful?

The Bank’s previous single tool of interest rates has been a double-edged sword:  its simplicity helps with transparency of decision-making, but it is a very blunt instrument.

At the Chamber we have been discussing whether other thresholds would help address the issue of regional imbalances.  Here are some of our thoughts around this

–        Would a possible Bank of England policy of forward-scheduled, staggered but small increases of, say, 0.25% to bring interest rates back up to something more normal be helpful?  Would it be acceptable to members to help planning and possibly avoid a potential rate-spike scenario at some point?

Some commentators, such as Matthew Whittaker, senior economist at independent think tank The Resolution Foundation, suggests in his blog on the Independent website that the Bank of England should use wage indicators as well as unemployment.  Would that provide a solution?

–        Banks are still not lending to SMEs, to the volume that is required to stimulate growth, productivity and investment.  Should the banks be publicly rated in a league table so the public can see what is going on?

Perhaps the biggest question is – if growth gets back to 2.5% when will companies feel that they can pass that on in wage rises, when productivity is still such a big issue that needs to be closed?  Improving wages will only make the productivity gap worse and make UK goods and services more expensive.

We would welcome views – do the School of Management’s academics and alumni around the world have thoughts and experiences to share?  How are other economies looking at this?  What are the views of Bradford’s business community?

3 thoughts on “Will Bank of England’s forward guidance work for the regions?

  1. Abhijit Sharma

    This is an interesting blog post which raises a number of interesting points. At the macroeconomic level, a clear link between productivity rises and wage increases is necessary to avoid general price rises (i.e. inflation or cost-push inflation). There is strong evidence of similar concerns in emerging economies such as India where the central bank has had to consider inflationary pressures (through the Reserve Bank of India has recently held rates constant). Similar concerns have arisen in China too, but in the past few months, both China and India have witnessed lower rates of inflation partly as a result of lower growth in the world economy.

    There is also the issue of differential unemployment rates for the UK as a whole and Bradford. An important proxy that the Bank of England is observing closely is the UK unemployment rate which is still above the (informal) trigger rate of 7%. Even if we assume similar rates of growth across the UK (which doesn’t appear to be the case at the moment with the North growing more slowly than the South), UK unemployment should reach 7% before Bradford does, but if rates start rising again then it may become harder to address unemployment in the Bradford region in the near future.

    In essence, strong and sustained economic growth should permit sustained wage increases (conditional upon improving productivity). Wage increases exceeding productivity gains can lead to aggressive wage bargaining in other sectors too and overall price rises, which in turn can have a negative effect on overall growth.

    The labour market is heterogenous and skills profiles differ, which implies that for some firms strategic decisions at micro level, for instance for skills retention, may mean higher wages for some employees, but even these firms are unlikely to be immune to general cost pressures. Absent strong firm level growth (and productivity growth), they would also need to rationalise and/ or control costs to remain viable.

  2. Professor Jon Reast

    I guess that it is easy to get stuck at the ‘macro’ (or overall industry or economy level) level with economics and forget that at the micro (i.e. individual firm) level, there will be a whole variety of experiences. There will be some firms where productivity is not a problem and therefore they will be more likely to move ahead with wage increases in order to retain key staff. Other businesses, who are perhaps lagging with productivity might (one could argue), be better to invest any revenue increases in revised work processes or capital assets which will help to increase productivity.

  3. Chris Rushworth

    Interesting Regional perspective quite thought provoking. Although you could argue this point for almost any national policy. Unless you were to give Regional discretion for implementing monetary policy (which would be incredibly interesting to see in practice). Regional positive and negative outcomes as a result of a national policy will always be seen. The unemployment rate “threshold”, was just that, a threshold not a trigger. Adding confidence that the BOE would not spring any surprises on a fragile economy. In fact Mark Carney has now indicated that he intends to scrap this as a mechanism altogether as the economic landscape is far different from that when this guidance was rolled out.

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