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Recovery 'still some way off' - MPC

The economy's crucial rebalancing away from consumer spending may already have begun but Britain's recovery still has "some way to go", according to the Bank of England.

Minutes of the Bank's March interest rate meeting revealed policymakers believe recent figures showing a surge in business investment marked the start of a reduced reliance on household spending - seen as vital to ensuring growth returns to pre-crisis levels.

The Monetary Policy Committee (MPC) cautioned the recovery was still some way off becoming balanced and sustainable, while the report also highlighted uncertainty among members over how much spare capacity there is in the economy.

The degree of economic slack has become a key measure for the Bank after it recently overhauled its forward guidance policy for interest rates, focusing on spare capacity.

There are concerns on the MPC that high levels of self-employment in the UK are masking the real level of spare capacity, although the minutes confirmed policymakers were at odds over the impact on the economy.

A hearing in front of MPs on the Treasury Select Committee last week revealed conflicting views among MPC members, with governor Mark Carney saying he believed labour market slack was slightly higher than the 1% to 1.5% range forecast by the Bank, while Martin Weale said it was under 1%.

Howard Archer, chief economist at IHS Global Insight, said the confusion over labour market slack could add to difficulties in interpreting the Bank's new forward guidance.

"With the focus now on the amount of slack in the economy rather than just the unemployment rate, we suspect that forward guidance is coming across as fuzzier and less easy for businesses and consumers to interpret regarding the prospects for interest rates," he said.

The MPC voted unanimously this month to keep interest rates at 0.5% - marking the fifth anniversary of record low borrowing costs - while all nine members once more also agreed to hold quantitative easing at £375 billion.

Policymakers have signalled that rates may need to rise in the second quarter of next year as the economic recovery picks up pace.

Mr Carney said in his Commons committee hearing last week that the economy will move from recovery to expansion this year.

A recent breakdown of gross domestic product growth for the fourth quarter boosted these hopes after revealing that business investment rose by 2.4% quarter on quarter in the final three months of 2013, with household spending increasing by a more muted 0.4% between October and December, down from 0.9% growth in the previous three months.

The minutes showed the MPC cheered "initial signs that the anticipated broadening from household to business spending might have already begun".

"Even so, there remained some way to go to ensure that the recovery was both balanced and sustainable," according to the report.

Ongoing slack in the economy helps keep a lid on inflation, which gives the Bank more room to hold rates lower for longer to support recovery efforts.

The minutes revealed that the strength of the pound was also helping rein in inflation, which has now fallen below the Bank's 2% target for the first time in more than four years.

But an overhaul of the MPC announced yesterday could have implications for rates decisions later this year, with Spencer Dale, Charlie Bean and Paul Fisher all leaving the committee and two new members announced - new deputy governor Dr Nemat Shafik and Andy Haldane, currently the Bank's chief economist and executive director for financial stability, who will become chief economist and executive director for monetary analysis.

A third new member is yet to be announced.


From Belfast Telegraph