These indicators clearly have an important bearing on macro-economic health: among workers whose disposable incomes have fallen materially below their pre-crisis levels; among savers, the rates of return on whose assets have fallen materially below their precrisis levels and are near-zero in inflation-adjusted terms; and among companies, whose underlying efficiency has flat-lined since the crisis. These trends are also closely linked. Weak productivity has constrained UK companies’ ability to pay higher wages, such that productivity and real wages have fallen in lockstep since 2008 (Chart 3). And this combination of a weak supply side and weak pricing pressures has in turn generated the need for low or negative real interest rates. To give these developments some context, consider a simple index of real wages, real interest rates and productivity growth. Given their recent trends, and with an eye to semantic symmetry, let’s call this an “agony index”. Charts 4 and 5 plot this agony index from 1970 and back to 1870. The agony index is currently at painfully low levels.5 It has been around 5 percentage points below its 1970–2014 average since 2008. Such an extended period of agony is virtually unprecedented going back to the late 1800s, with the exception of the aftermath of the World Wars and the early 1970s. So far, then, so bad. On this evidence, the UK economy is as weak as at any time in the recent or distant past. It is firmly on the back foot.
6  BIS central bankers’ speeches  To illustrate those dilemmas, consider some very simple and mechanical settings for monetary policy as given by a Taylor rule (Taylor (1993)). The simplest of the Taylor rules takes the form: 𝑖𝑡 − 𝜋𝑡 = 𝑟∗𝑡 + 𝜃𝜋 (𝜋𝑡 − 𝜋∗ ) + 𝜃𝑦 �𝑦𝑡 − 𝑦� 𝑡 �  In other words, the real policy rate (it – πt) deviates from its equilibrium rate (r*t) to the extent that inflation (πt) deviates from its target (π*) and output (yt) from its trend (ŷt). In Taylor’s original work, the feedback parameters, 𝜃𝜋 and 𝜃𝑦 , were both set at 0.5 and r* at 2%, in line with its historic average. If we plug measures of inflation and the output gap into equation (1), both historically and using the MPC’s forecasts for the future, we generate the Taylor-rule implied paths shown in Chart 22. Also shown is the path of actual and (looking forward) market-implied policy interest rates at the time of the August 2014 Inflation Report. Both in the years running up to the crisis, and in the initial crisis stages, these paths roughly coincided. Policy was broadly on its Taylor rule-implied path. Since around 2010, however, the two paths have parted company. On the Taylor rule path, monetary policy would have begun tightening at the end of 2009 and interest rates would be fully 2½ percentage points higher today. Taken at face value, this implied trajectory poses a challenge to current policy settings.