Will the Bank of England’s forward guidance work for the regions?
Bradford Chamber of Commerce recently co-hosted an economic breakfast with Bradford University School of Management and the Bank of England. Dr Ben Broadbent of the Bank’s Monetary Policy Committee addressed the event. Chamber President Paul Mackie, pictured right, writes the following blog.
At what point will interest rates start to rise again?
This question is tied up with the Bank of England’s forward guidance which Governor Mark Carney 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 recession. Here in the UK, forward guidance is 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]…”
When Dr Ben Broadbent visited, he briefed us on the economy and listened to the views of local businesses. With more than 70 at the meeting, this is clearly a topic still exercising minds.
The event provided a lively discussion – and challenges – for the Bank of England and raised a number of questions that I think will be important for our own region.
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).
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 trigger 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.
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.
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 triggers 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 target wages 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?