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BoE's Cunliffe: Weak pay and inflation data the reason for concluding slack remains

FXStreet (London) - Bank of England deputy governor for financial stability, Jon Cunliffe, appeared before the Treasury Select Committee today alongside BoE governor Mark Carney and fellow MPC members.

- “We were seeing signs of a strong recovery, with GDP increasing at an annualised rate of over 3% over the middle two quarters of the year. The key drivers of the recovery seemed to be renewed confidence, due in no small part to the de-escalation of the euro crisis and an easing in credit conditions.”

- “The squeeze from higher food and energy prices was coming to an end and inflation had just fallen by 0.5 percentage points, the largest fall in over 18 months. With unemployment at 7.6%, there looked to be ample spare capacity in the economy.

- “Surprisingly, despite this substantial and rapid fall in unemployment, nominal pay growth has come in much weaker than expected. On the average weekly earnings measure, annual whole economy regular pay growth was running at just 1.3% in the third quarter. That weakness is more than can be explained by weak productivity. Growth in ‘unit labour costs’ – pay relative to the output of the average employee – has been negative over the past year.”

- “This weakness in domestic price pressures has occurred alongside a benign external environment. In part due to the higher level of Sterling, import prices have fallen over the past year. Slower growth in Asia and the Euro-area, together with some positive news on supply, has left oil prices down by around a quarter on their level a year ago. Together, these factors have left inflation at just 1.2% in the latest data.”

- “The weak pay and inflation data, coupled with the strength in participation, have been the key reason why, despite unemployment falling through the 7% threshold in May, I have concluded in subsequent meetings that there remains substantial spare capacity in the labour market.”

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