Speaking at the London Business School today (18 December), the deputy governor for monetary policy addressed the use of data and estimates by the MPC, but also the problems the committee is facing due to the current “volatility of official estimates” and data.

He said a lot of economic metrics – such as GDP, employment and wages – may not be “perfectly measured”, which is often why the relevant information comes with a delay leading to revisions to several data sets.

For instance, Broadbent highlighted how estimated growth during 2020 and 2021 was revised up by almost two percentage points and, as a result, “the economy is now thought to have reached its pre-pandemic size nearly two years earlier than was previously thought”.

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Sometimes revisions are less important, he noted, but there is “almost invariably” a degree of measurement error in economic series.

He pointed to the recent steep decline in the response rate to the Office for National Statistics, forcing the agency to suspend the publication of its Labour Force Survey, used for employment and unemployment estimates.

Employment rates have started becoming of a greater importance since the Global Financial Crisis. Broadbent highlighted how, pre-crisis, there was a tight correlation between MPC policy decisions and GDP growth, since “an acceleration in demand would lead to lower unemployment”.

Yet, since the crisis, the committee has put greater weight on indicators such as wage growth and other “late-cycle measures of domestic inflation”.

That is why employment data has become more central to MPC policymaking, but also why the uncertainty around the data can be problematic.

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The deputy governor admitted that the absence of the Labour Force Survey “is not so serious” but noted the “temporary absence of the series for unemployment is felt a little more keenly”, as it is used to create models for wage growth.

In the meantime, the ONS has started using a proxy – namely the claimant count – although he said it may not be “quite as accurate” as the employment figures.

All these indicators, Broadbent explained, are needed for the MPC to understand the behaviour of the supply side of the economy, so that it can make policy “more robust to uncertainty”.

However, he said it is not possible to offset that uncertainty entirely, as when the economy is subjected to a greater range of shocks it can be harder to identify their individual contributions.

“Even if the observed economy were measured with perfect accuracy our understanding of what has caused it – the precise behaviour of these underlying economic forces – would still be imperfect,” he said.

“And in the real world there is inevitably a degree of inaccuracy in economic measurement. Currently, if only for a short period of time, there is a little more uncertainty than usual about the behaviour of unemployment.

The deputy governor noted that official estimates of wage growth have been volatile and other indicators have exhibited slightly lower – if still very elevated – rates of growth through much of this year.

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“As a general matter, one implication of this additional uncertainty is that, in response to any given shock, the reaction of policy is likely to be somewhat more delayed than in a world of perfect and complete information,” he said. 

“It takes time to understand the forces driving the economy, particularly if one is having to rely on nominal variables like services inflation and wage growth, things that would normally be seen as late-cycle indicators. The same goes for uncertainty relating to the accuracy of the observable variables themselves.”

Broadbent’s speech follows conflicting signals by the Federal Reserve, European Central Bank and BoE, despite all three deciding to hold rates at their respective meetings last week.

The Fed hinted at a more dovish stance in the second half of 2024 with potential cuts worth 75 basis points, whereas the ECB and BoE both reiterated the message that has marked the last few months of monetary policy of rates remaining higher for longer.