BANK of England Governor Mark Carney has dampened speculation about a near-term rise in benchmark UK interest rates by highlighting the degree of slack in the labour market.
Mr Carney, presenting the Bank's latest quarterly inflation report yesterday, underlined the fact that 1.4 million people in the UK were having to work in part-time jobs because they were unable to find full-time work.
He also flagged up the continuing challenges facing the economy, and the "benign" outlook for inflation, while signalling a belief that monetary policy would not be the right tool to deal with any risk of a house price bubble.
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His dovish comments provided food for thought for those projecting the first rise in UK base rates from their record low of 0.5 per cent could come before the end of 2014, and sent sterling lower.
The pound was at $1.6783 in London at 5pm yesterday, down more than half-a-cent on its closing level on Tuesday. Sterling was also weaker against the euro. The single currency was trading at 81.74p at 5pm, up from 81.44p at the previous close.
Mr Carney said: "Companies appear to be operating at around normal levels of capacity, but despite recent progress, significant slack remains in the labour market.
"That slack is evident in the 1.4 million people who are working part-time because they are unable to find full-time work, as well as in an unemployment rate of 6.8 per cent that remains significantly above our estimate of its current equilibrium."
He added: "Our slack estimate is in some respects cautious. It does not reflect that the long-term unemployed have recently been finding work at a faster rate than usual, nor does it allow for any of the unprecedented rise in self-employment, which has accounted for over half of the increase in total employment since last summer, to represent additional 'hidden' slack."
Howard Archer, chief UK economist at consultancy IHS Global Insight, said: "The Bank of England's quarterly inflation report for May seemingly puts to bed, for now at least, the idea that interest rates could rise before the end of 2014.
"The over-riding impression … is that the Bank is still not in any hurry to raise interest rates despite the fact that the economy has now sustained decent expansion since early 2013 and the unemployment rate has come down pretty rapidly to 6.8 per cent."
Mr Carney revealed that, while there was a range of views on the Bank's Monetary Policy Committee, the MPC's best collective judgment was that the margin of spare capacity likely remained in the region of between one per cent and one-and-a-half per cent of gross domestic product.
He added that the MPC's central estimate was that spare capacity was likely to be used up more slowly than in the recent past, in part because output growth moderated but also because productivity growth was expected to resume.
The Bank of England is projecting the UK economy will grow by 3.4 per cent this year. It has raised its forecast of expansion in 2015 from 2.7 per cent to 2.9 per cent.
However, Mr Carney said: "The outlook for inflation in the medium term remains benign."
Highlighting continuing challenges facing the UK economy, Mr Carney said: "The time taken to absorb spare capacity is a reflection of the continued headwinds faced by the economy. The financial sector continues to heal.
"Public and private balance sheets continue to be repaired. Export growth faces a 10 per cent appreciation of sterling over the past year. And growth in the world economy remains muted."
In spite of 0.8 per cent growth in UK GDP in the first quarter, it was 0.6 per cent below its peak in the opening three months of 2008, ahead of the recession.
Mr Carney said: "Amidst the excitement that output is close to regaining its pre-crisis level, we should not forget that the economy has only just begun to head back towards normal."
Samuel Tombs, UK economist at consultancy Capital Economics, said: "May's fairly dovish inflation report might go some way to cool expectations that the Monetary Policy Committee will raise interest rates as soon as the first quarter of next year."
He noted Mr Carney had reiterated that monetary policy was the last line of defence in dealing with matters of financial stability and that the Financial Policy Committee would act first to cool the housing market, if it thought that such action were required.