BoE on QE and productivity

The minutes from the BoE’s 9-10 May meeting show that they were close to doing more QE.

for several members, the decision not to expand the asset purchase programme at this meeting was finely balanced

Given the softening of the outlook, I expect that they will deliver at least 25bn and possibly 50bn of more QE at their next meeting (from the present 325bn)

With the level of output ~4% below the prior peak, and not expected to reach that level until 2014, the mystery of elevated inflation continued to tax the MPC. Their deliberations on the issue of weak productivity growth are interesting, because this is a global problem:

The Committee discussed two possible broad explanations for this that were not mutually exclusive. Both suggested that the supply capacity of the economy had weakened alongside the weakness of demand. First of all it was possible that the weakness in productivity and demand had a common cause, such as the widespread fear of a disorderly resolution of the euro-area crisis. Symptoms would include elevated risk premia that raised bank funding costs and the cost of capital to companies, whether they were reliant on the banking system for finance or not, and weakened physical investment and innovation. The second explanation was that the weakness in productivity had itself been caused by weakness in demand, perhaps because of mothballing of capital or reduced scope for learning on the job.

Myself, i favour the demand answer – weak demand conditions may have lowererd measured productivity. Most capital is tuned to run with a given scale, and use of this vintage of capital at lower rates of production (less staffing, and lower units of output) ought to mean lower productivity.

Picking up the mothballing is hard, so this appears as an MFP shock – as you have overstated the capital services flow. This is basically what we are seeing in many economies just now.

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