Is the MPC's view on slack still plausible?

May’s Bank of England Inflation Report proved to be a blow for those predicting that the Monetary Policy Committee (MPC) would signal its intention to raise interest rates soon. The MPC stood by its assessment made in February that there remains ample spare capacity in the economy and that it will be used up only gradually over the coming years.

On the face of it, the MPC’s forecast for unemployment to fall only gradually may look implausible given the strength of the latest jobs figures. But it assumes only a modest recovery in productivity. And while it is impossible to estimate with certainty how much spare capacity there is, the weakness of the latest earnings figures provides a strong hint that there is still plenty in the labour market.