"There is going to be a lot of attention on every single mention about spare capacity in every speech by policymakers"
- David Owen, chief European financial economist at Jefferies
The Bank of England's new, adjusted forward guidance has shifted the focus of monetary policy away from one key economic indicator that was difficult to predict, to another which is almost impossible to measure. At first glance, the central bank has completely revamped the framework for its forward guidance that was introduced by Mark Carney during his first meeting as the Governor. The essence of Carney's policy is still not changed. The BoE is striving to achieve a balanced and long-term economic prosperity. The focus is now shifted to the excess slack in the economy, and keeping that in mind the MPC has also deployed a range of indicators in order to better gauge the degree of spare capacity within the economy.
Nevertheless, the amount of slack in the economy vary widely and cannot be identified precisely. Currently, the BoE is expressing its concerns about the productivity. Their estimates are showing there is still a spare capacity equivalent to almost 1.5% of the GDP, based on factors like the number of people unemployed and those wanting to work more. Analysts pointed out that the productivity will not pickup in the next few years, implying less inflationary pressure.
Taking into account all previously mentioned, the central bank wants to keep investors on their toes about the date when they will start raising rates, even though markets are betting the first rate hike will occur in the second quarter of 2015.
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