Taken together with workers’ apparent willingness to accept lower real pay levels, the non inflationary rate of unemployment, or NAIRU, looks to be at a lower level than we might have expected. The MPC already built into its August forecasts the possibility of some positive labour supply shock. It took the judgement then that, contrary to previous assumptions and the experience of previous recessions, the labour participation rate would be less affected by an ageing population. And, having seen little evidence of pay pressure, it took the view that the NAIRU had fallen to 5.5% – not far off the 5% rate that prevailed in the UK before the crisis. But even relative to last August’s judgement on labour supply, pay growth still looks weak relative to models calibrated on the pre-crisis period. At the same time, unemployment is still falling more rapidly than expected. 4  BIS central bankers’ speeches  The MPC is left with a judgement whether those falls in unemployment presage an imminent sharp pick up in pay growth. Or whether the continued weakness in labour costs means we can afford to let falls in unemployment continue to run for some time yet. As always with economics, it is possible to make a good case on either side. We will know more when we see the extent of pay pressures in the big annual settlement rounds in the first quarter of next year.
Luis de Guindos: Key vulnerabilities for euro area financial stability Remarks by Mr Luis de Guindos, Vice-President of the European Central Bank, at the meeting of the Financial Stability Contact Group, Frankfurt am Main, 2 October 2019. * * * Let me start by thanking you all for participating in this meeting of the Financial Stability Contact Group. These meetings are a key feature of the ECB’s market intelligence gathering activities. The financial stability environment has certainly remained challenging since this group last met in March. The global economic outlook has worsened since then, and political and policy uncertainty has increased in a number of areas. Taking this into account, we continue to see four key vulnerabilities for euro area financial stability: (i) first, a risk of mispricing of some financial assets; (ii) second, high public and private sector indebtedness in several countries; (iii) third, in view of banks’ subdued profitability outlook, we see a risk of hampered bank intermediation capacity; and (iv) fourth, vulnerabilities stemming from increased risk taking in the non-bank financial sector. We see the likelihood of these vulnerabilities unravelling in a disorderly manner over the next 18–24 months as remaining largely unchanged. This is because the now widely expected “lowerfor-longer” interest rate environment mitigates many of the possible triggers for corrections over the short to medium term.