March 28, 2014 / 7:23 AM / 6 years ago

BoE assessment of slack in economy is right but hard to judge - Reuters poll

LONDON (Reuters) - The Bank of England’s assessment of how much slack there is in the British economy is probably correct, most economists polled by Reuters said, but some were unconvinced.

Having abandoned tying monetary policy to unemployment after just six months, the central bank said it would focus on 18 measures of data to gauge the right time to start raising rates, one of which was how much spare capacity the economy had.

It reckons there is around 1-1.5 percent slack. Thirty of the 41 economists polled by Reuters this week said that was about right, but some voiced concerns on how difficult it was to gauge.

“The BoE has said it wants to close the output gap, which is unobservable. Do I agree with their estimate of where this invisible concept is? I can’t even define what they mean,” said Michael Saunders at Citi.

Saunders was not alone in voicing concern. One economist described it as “meaningless” and another as a “nebulous concept”.

Under its revised forward guidance, the Bank is also focussing on measures such as business investment, surveys and number of hours worked.

Britain’s economy will grow faster than its contemporaries’ in coming quarters, a Reuters poll earlier this month predicted, and should be back to its pre-crisis size by the end of June.

Consumers have led the rapid economic recovery and retail sales rose by more than expected in February, official data showed earlier on Thursday. Other data has also pointed to a solid recovery.

NO RUSH

Members of the Monetary Policy Committee have repeatedly said they are in no rush to raise interest rates from their record low of 0.5 percent.

Martin Weale, who is on the MPC, said on Wednesday interest rates would not remain there indefinitely but added that any rises would be “relatively gradual”.

None of the 61 economists polled expect any movement when the MPC meets on April 10 and medians suggest the first rise, of 25 basis points, will come in the second quarter of next year, in line with the last several Reuters polls.

That will be followed by a similar move in the third quarter.

However, three of the nine MPC members will be new by August, adding some uncertainty to the mix.

“The two known incoming MPC members, Nemat Shafik and Andy Haldane, have yet to make their views known on monetary policy while the third new MPC member is yet to be appointed,” said Howard Archer at HIS Global Insight.

Still, economists gave only a median 30 percent chance of a rate move this year but a more certain 80 percent likelihood that the Bank will have hiked rates by the end of next year. It was an almost definite 95 percent chance they have moved by the end of 2016.

With inflation running far below the central bank’s target, only six of the 61 economists polled expect a hike this year.

Inflation fell to its lowest in more than four years in February, coming in at 1.7 percent, dipping further below the BoE’s 2 percent target.

Easing price pressures have underpinned the view the central bank can keep monetary policy loose for a while without the risk of triggering inflation even as the economy recovers quickly.

“Given the current rhetoric, the MPC does not sound in a hurry to act and the chances of a hike this year are limited,” said Peter Dixon at Commerzbank.

Polling by Sarmista Sen and Siddharth Iyer; Editing by Larry KIng.

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