Living standards are likely to fall further, and there is little the Bank of England can do about it, the central bank’s chief economist warned yesterday.
Spencer Dale said Britain’s economy still had further to go to adjust to the aftermath of the financial crisis, and that a mix of slow wage growth and stubborn inflation is likely while that happens.
“Monetary policy has only a limited role to play as an economy adjusts to these types of real shocks,” he said in a speech to economists in London.
“The (BoE) can try to pick the least costly route, but ultimately it can’t avoid the journey being long and painful,” he said at the event, hosted by MNI Deutsche Boerse.
The BoE stopped buying more government bonds to stimulate Britain’s economy last month, and economists polled by Reuters are fairly evenly divided on whether it will ever resume them.
Mr Dale’s remarks come after a mixed set of labour market data. This showed a record number of Britons in work, but a rate of unemployment that is still high at 7.8 per cent, and wage growth slowing to 1.7 per cent – well below inflation at 2.7 per cent.
Britain has recovered much more slowly than most other big economies since the financial crisis, and government forecasts suggest it will tip back into contraction during the current quarter, just three months after it came out of recession.
But Mr Dale said the amount of slack in Britain’s economy was not a reliable guide to inflation pressures.
British inflation has been above its 2 per cent target since December 2009, and the BoE does not forecast it will fall below target until the second half of 2014. “The stickiness of inflation is a by-product of the real adjustment that our economy has been forced to make,” Mr Dale said.
“Looking ahead, it seems likely that this adjustment process is not yet complete and so the stickiness in inflation may persist for a while yet.”
Mr Dale’s comments about the limits of monetary policy echo closely those given by Governor Mervyn King in a speech in New York on Monday.
Mr Spencer joined the BoE in 1989, and was appointed private secretary to Mervyn King, the current Governor, in 1997, following several years working as an economist on a variety of monetary policy and financial market issues.