16 The Bank of England is playing its part to in the wider effort to ensure that productivity growth can resume, by taking steps to ensure that the financial system will be well placed to facilitate the implementation of these ideas, and the allocation of resources across the economy more generally. For example, much of the work of the Financial Policy Committee (FPC) in the years since the financial crisis has been focussed on ensuring that the banking system is resilient and well-capitalised. And the FPC is pursuing a medium-term objective to ensure that there are diverse and resilient sources of market-based finance to complement the banking sector. This is borne out in the improvement in the availability of credit to companies such as yours, which our agents tell us has been easing across the board (Chart 8). The combination of an impressive stream of ideas, and a financial system stable enough to facilitate their implementation means I am reasonably confident that productivity growth will return at some point. Moreover, I think it is reasonable to expect that resumption in productivity growth to come over the next year or so as the continued narrowing of slack in the labour market raises the incentive to increase output by increasing output per worker. But – as many a forecaster of productivity has learned – picking exact inflection points for macroeconomic variables can be difficult, so the degree of uncertainty around the timing of this is high. 5.
Indeed as a monetary policy maker, that is perhaps the most important question to ask. Judging by the behaviour of measures of inflation expectations derived from index-linked gilts, markets are attaching a low probability to the idea that the current weakness in inflation will prove permanent. Market-implied measures of long-term inflation expectations have been remarkably stable over the period in which inflation has declined (Chart 3). That is consistent with the MPC’s view that the majority of the decline in inflation over the period since the middle of 2013 can be accounted for by factors that are unlikely to have permanent effects on inflation. There has been a 44% decline in the price of oil from its peak, and a 17% appreciation of sterling since early 2013, and such phenomena can be expected to have large – but not permanent – effects on prices of consumer goods. The most important determinant of inflation at the horizon the MPC is concerned with is domestically generated inflation. And measures of domestically generated inflation (such as unit wage costs, Chart 4) have stayed relatively stable during the period in which headline inflation was declining. But what is a little puzzling is that, given the growth of the economy in recent years and the associated decline in economic slack, measures of domestically generated inflation have not picked up as quickly as we would otherwise have expected.