Britain’s buoyant economy is a headache for some. Mark Carney, governor of the Bank of England (pictured above), has described it as a good problem to have, but a problem nonetheless.
The unemployment rate touched a five-year low yesterday, and Carney held a press conference to explain the bank’s latest projections for the UK economy. For months he’s been trying to keep the financial markets from getting ahead of themselves, as consistently strong economic data led investors to push up the value of the pound, as they expect an interest-rate hike sooner rather than later.
Until recently, the bank said it would hike its benchmark rate—which has been rooted at 0.5% since 2009—only when the jobless rate dropped below 7%. When it crossed this threshold a few months ago, and Carney still wasn’t keen to raise rates, he revised the bank’s trigger, instead tying it to an array of measures of “spare capacity,” or “slack.”
A scan for mentions of “slack” in the bank’s quarterly outlook reports vividly illustrates the governor’s new preoccupation:
So what is slack? It’s what you get when companies aren’t running near full capacity and people aren’t working as much as they’d like. Hiking interest rates isn’t warranted until this spare capacity is taken up, according to Carney’s thinking.
For example, the recent rise in jobs has been fuelled by a sharp increase in the ranks of the self-employed, which might mean that people are starting their own businesses when they can’t get a corporate job. The bank notes that recent surveys suggest the self-employed would rather work more hours—that’s a sign of slack. What else? Wages have only just begun to outpace inflation, in another sign that the labor market isn’t yet firing on all cylinders.
Slack may be a somewhat squishy, subjective economic concept, but Carney and his colleagues are committed to letting it guide their decisions on monetary policy—thus the repetition. In all, the bank reckons that the margin of slack in the British economy is worth between 1% and 1.5% of GDP, which they mention around a dozen times in their latest report (they are nothing if not persistent). Don’t expect rates to rise until this gap narrows, however strong the economy seems according to more traditional measures.