Page 4  Normalisation of the monetary policy stance With the failure of Lehman Brothers in 2008, policy rates across the world were reduced quickly and substantially, generally being floored at what were then seen as their effective lower bounds. Additional monetary easing was then provided through large-scale asset purchases or quantitative easing (QE). The resulting very supportive overall stance was justified by the emergence of downside risks to inflation targets, a weak economic outlook and tensions in the financial system, all of which had emerged in the aftermath of the financial crisis. Although the details varied from one jurisdiction to another, this very supportive monetary policy stance was maintained for the bulk of the next decade: through the euro area sovereign crisis, through the challenges of Brexit, through the Covid pandemic and its aftermath. This prolonged period of policy support was exceptional. To give a sense of this: when I joined the MPC in September 2021, the Bank of England’s policy rate – Bank Rate – was at the lowest level seen during the Bank’s more than three centuries of existence. And – at least in absolute nominal terms – the Bank’s balance sheet was larger than it had ever been. As the recovery from the pandemic became better established and risks to inflation became first more balanced, and then shifted to the upside, the need to normalise the monetary policy stance became evident across many jurisdictions, including in the UK. This has been an important driver of monetary tightening over the past year.
In the US, demand has played an important role: the US economy has more than recovered pre-pandemic levels of activity. So there are grounds for seeing US labour market tightness as a symptom of ‘overheating’ in the broader economy. This case is harder to make in the UK, where aggregate activity has still to regain pre-pandemic levels on the latest vintage of data. As a result, adverse supply effects seem to play a larger role in Britain. That said, vacancy rates have reached historical highs in the UK over the past year, perhaps redolent of strong demand for labour and echoing developments on this side of the Atlantic. But high vacancy rates have been associated with high hiring rates: the labour market has exhibited a high degree of ‘churn’, with many people moving jobs. In part, this may reflect a process through which workers are allocated to more productive activities, after the pandemic – and the UK’s furlough scheme introduced in response to it – had constrained their flexibility to move from one job to another. Behind labour market tightness in the UK lies a decline in participation rates among the working age population, particularly those in the 50-65 age group. The reasons behind this decline remain the subject of debate, but the impact of the pandemic on early retirement and long-term health, as well as underlying demographic developments, all seem to have played a role.