MNI POLICY: BOE Looks At Raising Equilibrium Jobless Estimate

The Bank of England will examine whether to increase its estimate of the level of unemployment compatible with stable inflation in its February Monetary Policy Report, a move which could mean it was less likely to slow the pace of interest rate hikes as joblessness rises.

At the start of 2021 Bank staff estimated the so-called non-accelerating inflation rate of unemployment at around 4.25%, and it will only be in next month’s MPR that it delivers a fresh stock take of the labour market, prompted by a recent decline in participation rates. Falling participation seems to be partly linked to an increase in long-term sickness, which work by MPC member Jonathan Haskel and Bank economist Josh Martin has indicated has moved markedly higher since the Covid pandemic than indicated by some official data (see MNI INTERVIEW: Long-term Sickness Hits Jobs Market- BOE Haskel).

Other factors include Brexit, which cut off a supply of European workers but opened new less flexible avenues for working visas tied to jobs in specific sectors, and an increase in early retirement, which may be explained by savings accumulated during lockdowns and rule changes allowing more flexible access to pensions.

IMPORTED INFLATION

NAIRU might also be rising as a result of an adverse external environment, with the Ukraine conflict pushing up the cost of energy and other imports more quickly than the prices of UK exports, according to BOE Chief Economist Huw Pill in a speech on Jan. 9. A new NAIRU estimate will be key to calibrating the monetary policy response to this new self-sustaining inflation impulse, he said.

The MPC is also set to review its projections for joblessness in the Feburary forecast round. Its November estimate, which was more pessimistic than those of many external forecasters, saw the jobless rate rising to just under 6.5% on the Labour Force survey measure by the end of the three-year forecast period, with slack increasing to to 3% of potential GDP.

With some recent media commentary pointing to possible green shoots of recovery in the UK economy, MPC members remain focussed on upside risks to inflation, with external member Catherine Mann saying that elevated price expectations kept her awake and night and Pill warning that higher energy prices combined with "a tight labour market (and) adverse labour supply developments ...create[] the potential for inflation to prove more persistent."

Data published by the Office for National Statistics Wednesday showed the unemployment rate unchanged at 3.7% in November. Total average weekly earnings rose at 6.4% year-on-year in the three-month period, a near-record level but still well below inflation.