18  See Barnett, A, Batten, S, Chiu, A, Franklin, J, and Sebastia-Barriel, M (2014), “The UK productivity puzzle”, Bank of England Quarterly Bulletin, Q2, for an analysis of the UK’s “productivity puzzle”. The standard view has been that the UK has suffered from a collapse in the underlying growth rate of productivity. On that basis, we would not expect there to be significant scope in future for either productivity or real wage growth. The interpretation of the recent behaviour of the labour market as a labour supply shock has more positive implications for the future. 6  BIS central bankers’ speeches  3. Monetary policy implications  One of our roles at the Bank of England is to deliver price stability in a way that supports jobs and growth. Our price stability objective is clear: the inflation target of 2% CPI inflation. Supporting jobs means helping the economy reach the maximum sustainable level of employment. That level changes as the economy changes. That is why, a little more than a year ago, even though inflation had been above the target for most of the past five years and economic growth was poised to accelerate, we did not raise interest rates from their historic low level of ½%. We did not because we recognised that the UK had a huge number of unemployed and under-employed workers and that the economy was running below full capacity. We expected inflation to fall back. We saw that confidence might have been returning, but it remained fragile.
6 An alternative interpretation is that the true expectation of market participants is for Bank Rate to increase more quickly than that, but that they are particularly worried about downside risks and are happy to accept a lower expected return in exchange for insurance against bad outcomes. 7 This would be consistent with the risks to the world economy that have come to the fore over the past year as emerging economies grapple with the twin challenges of transitioning to slower potential output growth and lower commodity prices. Although the direct trade links between emerging economies and the UK are relatively small, the indirect effects of a more dramatic emerging market slowdown through confidence and financial channels could be significant. I suspect this latter interpretation is closer to the reality. Personally speaking, should the downside risks from the world economy fail to materialise, and absent further shocks, once wage growth has returned to a level consistent with inflation returning to target I would expect the economy to warrant a path for Bank Rate that increases more quickly than implied by the market yield curve used to condition the November Inflation Report. I think it is interesting to note that surveys of economic forecasters – a more direct measure of the expected future path of interest rates – show expectations for a faster pace of increases in Bank Rate. Having said that, I think all agents, and all members of the MPC, expect the future path to be gradual and limited. 3.