BoE's Broadbent urges focus on employment, not growth

DURHAM, England (Reuters) - The Bank of England should look at robust employment growth rather than weak output as a guide to future inflation and the appropriate stance for monetary policy, BoE policymaker Ben Broadbent said on Wednesday.

Broadbent opposed restarting the BoE's asset purchase stimulus programme in July, and in a speech to be delivered to Durham University's business school he outlined why a lack of demand was not the underlying problem facing Britain's recession-hit economy.

Following the financial crisis, banks seemed to be too willing to show forbearance towards unproductive businesses - for example in commercial real estate - while starving more promising firms of capital, he said.

This largely explained why British productivity had been so weak since the financial crisis. Firms with potential could hire more staff, but were unable to access the loans needed to fund investment to make them more productive.

"We should set policy not just on its ability to affect demand but its capacity to improve the flow of finance in the economy as well," Broadbent said, praising the BoE's Funding for Lending Scheme, which offers banks cheap finance if they lend more to businesses and households.

"Second, as monetary policymakers, we should probably pay less attention to movements in output and relatively more to changes in employment," he continued. "We're likely to want to ease policy if employment falls and to tighten it if employment growth improves."

Since the financial crisis, British inflation - which has generally been above its 2 percent target - had been much more strongly correlated with employment than output, he added.

The number of Britons claiming unemployment benefit unexpectedly fell in August by the largest amount since June 2010 and employment rose to the highest level in over four years between May and July, official figures showed on Wednesday.

NO MORE STIMULUS?

The BoE's Monetary Policy Committee voted 7-2 in July to restart their asset purchase programme - also known as quantitative easing - and buy 50 billion pounds of British government bonds over the following four months.

Most economists polled by Reuters expect the central bank to approve another 50 billion pounds of asset purchases in November. David Miles, the most frequent advocate of further asset purchases this year, said on Tuesday that the Bank was right to keep pursuing a stimulatory monetary policy, though he remained "open-minded" about what to do in November.

A major division between policymakers is the extent to which the ability of Britain's economy to generate growth without creating inflation - its supply capacity - has worsened since the financial crisis.

Broadbent said supply had suffered a "genuine hit" and would be slow to recover, while others such as Miles say weak productivity is a result of unusually low demand, or possibly related to firms hoarding labour in anticipation of an upturn.

British economic output recovered much more slowly than in other big economies, and the economy re-entered recession late last year. Employment has been rising strongly despite this, and a survey from recruiters Manpower earlier this week showed firms planned to embark on their biggest hiring spree in five years later this year.

Broadbent said the financial crisis, government austerity and a subsequent rise in commodity prices were leading to big changes in Britain's economy, as energy-intensive firms and those that relied on public or consumer spending suffered.

But while the labour market appeared to be adjusting as people changed jobs, bank loans were much slower to follow suit.

"Labour has been relatively mobile. The same cannot be said for capital," he said.

At some point, when the banking system had healed, renewed capital flows could lead to a lengthy period of above-average productivity growth. But predicting when this would occur was not possible, Broadbent said.

(Editing by Catherine Evans)

Source: http://news.yahoo.com/boes-broadbent-urges-focus-employment-not-growth-110131752--business.html

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