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Worklessness and mass migration make it harder to set interest rates, warns Bank’s chief economist

Policymakers will ‘proceed cautiously’ as they try to work out whether inflation will persist

Worklessness and large-scale migration are making it harder to set interest rates, the Bank of England’s chief economist has warned.
Huw Pill said problems with the official data on unemployment, combined with big shifts in the working population heralded by a rise in worklessness and record levels of migration, make it difficult to work out how much inflation is coming through the jobs market, and so to calculate the correct level of borrowing costs.
“We have seen big movements in the degree of labour force participation. After the pandemic, some people did not come back into work, there were high levels of retirement, there were ill health issues, and so forth. We have also seen lots of movements in migration,” Mr Pill said.
“All of these things might be changing what is the normal, or inflation target-consistent, level of unemployment, and that is a necessary basis on which to gauge whether the unemployment that we observe, which we measure imperfectly, is indicative of slack or not.”
“Slack” refers to the economy’s capacity to grow without creating too much extra inflation. It includes businesses’ ability to take on more work or the number of unemployed people in the jobs market who are available to start a new job.
If the economy has lots of slack, the Bank of England is more able to cut interest rates to stimulate spending and growth without sending inflation soaring, because competition for both jobs and work keeps a cap on rising prices.
When there is little slack, higher interest rates might be more appropriate to keep prices in line.
Mr Pill was speaking after the Bank’s Monetary Policy Committee cut rates from 5pc to 4.75pc on Thursday, the second cut this year, after borrowing costs peaked at 5.25pc.
Other central banks are cutting interest rates more quickly. The European Central Bank has cut three times, from 4pc to 3.25pc, and the Federal Reserve in the US has also cut more sharply, from 5.5pc to 4.75pc.
The Bank of England has stressed it will proceed cautiously, as it tries to work out whether or not inflation will persist. This task has been made harder by shifts in the jobs market and problems in the data the Bank uses.
The number of “economically inactive” adults of working age has risen by almost 900,000 since the pandemic, according to the Office for National Statistics. This increase in worklessness has been driven by a marked increase in student numbers and ill health.
There are 2.75m people of working age who cite long-term sickness as the reason they are neither in work nor looking for a job. That is up by more than 600,000 from the eve of the pandemic.
Worklessness has held back growth in the economy and makes it harder to judge whether the low unemployment rate – of around 4pc – is a sign of economic health.
Migration is also influencing the amount of slack in the economy. Last year net migration into the UK stood at 685,000 people, the ONS estimates, down from 764,000 in the previous 12 months. That is up from a typical pre-Covid level of around 200,000 per year.
The number of foreign-born people working in the UK has risen by 1m since the end of 2019, to 6.8m people.
Another key problem is trying to measure unemployment accurately.
“As I think is well known, we have some challenges with the statistics at the moment,” the chief economist said.
The ONS estimate of the unemployment rate is based on surveys but participation fell precipitously in and after the pandemic. The stats body is currently overhauling its surveys to try to boost response rates.
Mr Pill said the Bank was planning to do a “deep dive” study on the shifting working population to get a better grip on the situation.
He said: “We will, before the next February forecast, do a deep dive into some of these issues, particularly the supply side issues about labour force participation, investment, productivity and so forth.”

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