Visual summary - Inflation Report August 2019

The outlook for the economy

In a nutshell

The interest rate decision

Our role is to set to influence the amount of spending in the economy in order to ensure (the pace of price rises) returns to our 2% target sustainably.

Low and stable inflation supports growth and jobs.

Over the past few years, our economy has needed interest rates to stay very low as we recovered from the global financial crisis.

As our economy started to grow more quickly, and with inflation above the 2% target, it needed a little less support. So we raised the official interest rate from 0.25% to 0.5% in November 2017 and then from 0.5% to 0.75% in August 2018.

Since then, the UK economy has slowed as firms’ uncertainties about Brexit have become entrenched and growth in the world economy has eased. UK inflation has fallen back to our 2% target. So this month we have kept interest rates unchanged.

Depending on the form Brexit takes, the economy could follow a wide range of paths.

If there is a Brexit deal, we think upward pressure on prices will build over the next few years and we will need to raise interest rates a bit more to keep inflation at target. We expect any rises in interest rates to happen at a gradual pace and to a limited extent. Interest rates are likely to remain substantially lower than before the financial crisis.

If there is a ‘no-deal’ Brexit, our interest rate decision would need to balance the upward pressure on prices from the likely fall in the pound and any reduction in businesses’ ability to supply goods and services, with the downward pressure from any cut in spending.

Whatever happens, we will set interest rates to return inflation sustainably to target and provide what support we can to jobs and growth.

  • Chart: See how the share of people out of work is now at its lowest level for more than 40 years

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Growth in the UK economy has slowed

Growth in the UK economy has been volatile during the first half of this year in part because of Brexit preparations.

Looking through those ups and downs, the speed at which the economy is growing has slowed.

Two main factors explain this slowing in growth.

First, economic growth in other countries has slowed. That has reduced the demand for our .

Second, by UK companies has weakened a lot.

It fell in the year to 2019 Q1, and has been weak since the EU referendum. Responses by businesses to surveys suggest this is mainly because of uncertainty about Brexit.

While businesses have been investing less, they have continued to employ more people. That helps explain why spending by households has been more resilient compared to businesses.

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Growth in the UK economy has slowed

  • Chart: See how global growth has slowed
  • Chart: See how UK business investment has fallen

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Inflation is at our 2% target

For most of the past two years, the prices of the things you buy have generally been going up by more than our 2% target.

That’s been mainly due to the big fall in the pound following the Brexit vote. The lower pound has meant that things businesses get from abroad cost more. Businesses have been passing those higher costs on to their customers. So that has meant higher prices in the shops.

Most of the rise in prices due to the fall in the pound has now happened.

So inflation is back at our 2% target.

We expect inflation to dip below the target for a while later this year, partly because of lower gas and electricity prices. But we do not expect it to persist.

Inflation dial

Inflation is at our 2% target

  • Chart: See how inflation is at our target

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Future interest rate rises should be gradual and limited in the event of a Brexit deal

A smooth Brexit means the UK and EU agree a deal and businesses have a period of time to adjust to the new relationship between the UK and the EU.

In that event, we expect upward pressure on prices to build over the next few years.

As a result, we think a gradual and limited increase in interest rates over the next few years is likely to be needed to keep inflation at our 2% target.

One factor contributing to upward price pressures is faster pay growth. Pay rises for most people have been low in recent years.

But the Office for National Statistics reports that, on average, pay is now rising at a faster rate. Average pay is also rising faster than prices, which should begin to ease the squeeze on living standards.

Faster pay growth is good news as it supports spending and helps the economy grow.

But it also raises costs for some companies, which pushes up the prices they charge.

Percentage sign

Future interest rate rises should be limited and gradual in the event of a Brexit deal

  • Chart: See how pay is now rising at a faster pace

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Whatever form Brexit takes, we will return inflation to target and support the economy

Our view that a gradual and limited rise in interest rates is likely to be needed is based on an assumption that there will be a smooth Brexit.

The path of the economy would be different if the UK were to leave the EU suddenly without a deal.

We think that in a ‘no-deal’ Brexit the pound would fall, pushing up prices in the shops.

We also think that it would affect companies’ ability to supply goods and services to some extent. For example, there may be delays at the border or other disruption to .

And people might also cut back spending if they become less confident about their future income

Our interest rate decision would need to balance the upward pressure on prices from the fall in the pound and any reduction in businesses’ ability to supply goods and services, with the downward pressure from any cut in spending.

Whatever happens, we will set interest rates to return inflation to target and provide what support we can to jobs and growth

UK and EU flags

Whatever form Brexit takes, we will set interest rates to return inflation to target and support the economy

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