Wednesday, September 27, 2023
Homethe worlds biggest risksUK productivity still 'too low'

UK productivity still ‘too low’

Productivity in the U.K. is still too weak and unemployment too high for the Bank of England to start tightening its monetary policy, former Nobel Prize winner for economics Christopher Pissarides told CNBC at the World Economic Forum in Davos.

Pissarides, a professor of Economics at the London School of Economics, said the U.K. still wasn't in a position where it could take further rate rises.

"Productivity is still low and we should be trying to get it up. I do think that productivity will rise once the economy starts picking up more robustly but until we see that but until we see that robust recovery — of 2 percent growth and we see productivity rising and unemployment fallen to about 6.5 or 6 percent, then I just wouldn't tighten."

(Follow CNBC's Davos debate on the future of monetary policy on our live blog)

His comments come after media speculation that the Bank of England could be about to amend its forward guidance after data showed the U.K.'s inflation and unemployment rates were near to targets that the bank had said could cause it to consider increasing interest rates.

(Read more: UK forward guidance safe… for now)

Data this week showed that the U.K. unemployment rate in December fell to within a whisker of the bank's target of 7 percent at which it had previously suggested it would consider raising rates.

However, Pissarides agreed with Carney who said on Thursday that there other factors would affect the bank's decision on rates, other than unemployment.

"The economy is too complicated to be measured by just one variable- unemployment is important but there are many other variables. I would be looking at other labor market variables and financial markets," Pissarides said.

(Read more: Mark Carney won't be 'railroaded' on rates: BAE's Carr)

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The BoE policy of forward guidance should be vaguer otherwise it can be a "straitjacket" for monetary policy, Pissarides told CNBC.

"I would not be giving very strict rules like 'if this goes there I would do that' — [the BoE] should be a little bit more vague," he added.

Pissarides instead advocated a "forward guidance-lite" policy where guidance was vague.

"It's forward guidance but it's not a straitjacket," he said, adding that Carney should adopt an approach in which he says "I'm looking at all the information and I'm saying what I'm looking at –which is important for transparency — but I'm not putting myself into a straitjacket and saying, 'this is what I'm going to do and no more and no less.'"

– By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt.


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