Inflation below zero. The biggest increase in real take-home pay in a decade. Falling unemployment. Borrowing costs at or close to record lows. The Bank of England forecasts suggest that the UK economy will hit a sweet spot in 2015.
Perhaps a bit too sweet. The last time there was a combination of crashing oil prices, easy monetary policy and a well-entrenched recovery was the mid-1980s and that ended with a colossal consumer and housing boom, followed by an equally colossal crash.
Threadneedle Street was at pains to point out that it saw no real comparison between now and the ill-fated Lawson boom. But it accepted there was a risk that the halving of oil prices would lead to demand and inflationary pressure being stronger than expected.
In those circumstances, the Bank would think of pushing up official interest rates from 0.5% by the end of this year, sooner than the spring of 2016 date pencilled in by the financial markets.
It also recognises there is another risk: that what it currently sees as benign disinflation turns into bad deflation: a persistent and generalised fall in prices that raises the real value of debt and encourages households and businesses to hoard cash.
That’s why the February Inflation Report floated the possibility that rates could be cut further or that the Bank’s monetary policy committee (MPC) might consider extending its £375bn quantitative easing programme by buying more UK government bonds from the market.
So what’s it going to be? Should we be bracing ourselves for the Bank to start tightening policy? Or for some fresh stimulus?
The chances of the Bank doing more QE or following the examples of Switzerland, Denmark and Sweden in announcing negative interest rates are pretty remote, given that Threadneedle Street has revised up its forecasts for growth, average earnings and inflation.
Indeed, Carney’s hint that rates might need to go up earlier than the City expects looks a bit like an attempt to warn households of the risks of “irrational exuberance”.
But as the Bank pointed out, oil prices were not the only factor responsible for bringing inflation down to much lower levels than it envisaged three months ago. There is still slack in the economy and, as the inflation report noted, labour force participation has been weaker than predicted.
The jobs market has cooled as the economy’s growth rate has slowed, making it a bit curious that the Bank has upped its forecasts for earnings growth in each of the next three years.
It is possible, of course, that the pick-up in demand the MPC expects as a result of falling oil prices generates a bit more wage inflation. But there’s not an awful lot in the recent data to suggest earnings growth is going to hit the 3.75% predicted for 2015.
Indeed, the big structural change since the mid-1980s has been the far weaker bargaining position for labour, which has kept wage growth in the 1-2% range, even when the economy has been growing strongly.
Unless that dynamic changes – and there is not much to suggest that it will – inflationary pressure from the labour market is going to remain muted. And, unless the MPC gets trigger happy, that should mean no early rate rise.
