BANK of England Governor Mark Carney has highlighted the unbalanced nature of the UK's economic recovery, and near-record proportions of people working part-time because they cannot find full-time jobs, while signalling a rise in interest rates is not imminent.
Mr Carney meanwhile unveiled expanded "forward guidance" on UK monetary policy, taking into account measures including involuntary part-time working and wage growth as well as the main unemployment rate, as he presented the Bank's latest quarterly inflation report yesterday.
He said the recovery had gained momentum as the Bank raised its forecast of growth this year from about 2.8% to 3.4% and increased its projection of 2015 expansion from 2.3% to 2.7%. But he flagged up continuing risks to recovery.
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Mr Carney said: "We've learned that, as yet, the recovery is neither balanced nor sustainable. A few quarters of above-trend growth driven by household spending are a good start, but they aren't sufficient for sustained momentum.
"Activity is still below its pre-crisis level. Wage growth remains weak and the household savings rate is likely to fall further. The pick-up in business investment is still in its earliest stages. The global outlook, though improved in the advanced world, entails growing downside risks in emerging markets."
Mr Carney declared there was greater slack in the labour market than the Bank would have expected, given strong growth in jobs recently. He attributed this partly to a fall in the number of long-term unemployed people. Mr Carney said this meant that a lower level of unemployment was consistent with stable inflation.
He also cited part-time working, and a surge in self-employment.
Mr Carney said: "The share of people working part-time because they can't find a full-time job remains close to a record high, and almost half of the recent increase in employment has been driven by self-employment, which is now at a record level."
He revealed the assessment of the Bank's Monetary Policy Committee was that spare capacity of between 1% and 1.5% of gross domestic product remained concentrated in the labour market, and added: "The effect of this slack is evident in low wage inflation, which is at around 1%."
The MPC said last August it did not intend to raise base rates from 0.5%, at which they have stood since March 2009, at least until the International Labour Organisation measure of unemployment had fallen to a "threshold" of 7%, subject to several caveats. Figures last month showed the ILO unemployment rate fell to 7.1% in the September to November period.
Mr Carney said the unemployment rate had fallen much faster than anticipated when forward guidance was put in place last August, and was likely to reach the 7% threshold by the spring.
But he declared that the MPC was, for the first time, providing guidance that it was seeking to absorb all the spare capacity in the economy over the next two to three years. He added that the MPC was also giving guidance that it judged that there remained scope to absorb spare capacity further before raising base rates.
The MPC is also now saying, if and when the time came that the economy could sustain higher interest rates, base rates are expected to rise only gradually.
Mr Carney said the MPC would monitor indicators including unemployment, participation in the labour market, average hours worked and the extent of involuntary part-time working, surveys of spare capacity in companies, labour productivity, and wages.
The MPC also provided guidance that any increases in base rates should be "limited".
Providing an illustration, Mr Carney said: "Even in the medium term, the level of interest rates necessary to sustain low unemployment and price stability will be materially lower than before the crisis. While it is hard to be precise, one illustration of the possible level of Bank Rate in the medium term can be derived from the latest forecast based on a market (rate) curve which approaches only 2% three years from now. In this forecast, inflation is near but a little below target and the spare capacity gap narrows but does not quite close."
Howard Archer, chief UK economist at consultancy IHS Global Insight, viewed the Bank's growth forecasts as "optimistic". He still believes base rates will start "inching up" from the second quarter of next year. Capital Economics predicts the first rate hike will not come until late 2015.