Visual summary - Inflation Report February 2019

The outlook for the economy

In a nutshell

Dial moving downwards

UK growth has slowed

Dial slightly over the 2% marker

Inflation has fallen back close to our 2% target

Percent sign with arrow pointing upwards

Future interest rate rises should be gradual and limited

UK and EU flags

Whatever form Brexit takes, we will keep inflation low and support the economy

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, uncertainties over Brexit have increased, UK economic growth has slowed, and inflation has fallen back close to our 2% target. We have kept interest rates unchanged this month.

If the economy performs as we expect, 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 low. 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.

Our view is based on the assumption that there will be a smooth Brexit where households and businesses have time to adjust to the new relationship between the UK and the EU.

Whatever form Brexit takes, we will set interest rates to keep inflation low and support jobs and growth.

  • Chart showing the Bank Rate from 10 years ago until present

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UK growth has slowed

The rate at which the UK economy is growing has slowed.

The Office for National Statistics estimates that the size of the UK economy increased by 0.3% in the three months to November. That is around half the rate of growth seen on average over the past five years.

Economic growth has also slowed in other countries such as Germany, the United States and China. That has reduced demand for our , contributing to the slowdown in the UK.

But the slowdown also reflects less spending by households and companies in the UK.

Investment by businesses has fallen over the past year. Responses by businesses to surveys conducted by the Bank of England and other organisations suggest that’s mainly because of uncertainty about Brexit.

In the past few months, spending by households has also slowed. For example, the Office for National Statistics estimates that spending in the shops and online fell by 0.2% in 2018 Q4, compared to a rise of 1.4% in 2018 Q3.

Dial moving downwards

UK growth has slowed

  • Chart showing change in UK business investment

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Inflation has fallen back close to our 2% target

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

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 rising costs on to their customers. So that has meant higher prices in the shops.

Inflation was also above target because the price of oil and gas had risen and pushed up petrol prices and your gas and electricity bills.

Most of the increase in inflation due to the fall in the pound has now happened. And oil and gas prices have fallen since November.

Reflecting both of these developments, inflation is now back close to our 2% target.

Arrow hitting a target board, slightly above the bullseye

Inflation has fallen back close to our 2% target

  • Chart showing percentage change in the inflation rate

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Future interest rate rises should be gradual and limited

Pay rises for most people have been low in recent years. But pay is now rising at a faster rate.

Pay is also now rising faster than prices, beginning to ease the squeeze on living standards.

The Office for National Statistics reports that pay increased by 3.3% in the three months to November 2018 compared to the previous year. That is faster growth than in recent years, although pay is still not rising as much as it did before the financial crisis.

Faster pay growth is good news – it will support spending in the UK and help the economy grow.

But it will also place some upward pressure on companies’ costs and the prices they charge.

That upward pressure on prices is why we think a gradual and limited increase in interest rates over the next few years is needed to keep inflation at our 2% target.

Two hot air balloons: the Pay balloon is rising faster than the Prices balloon

Pay is rising faster than prices, beginning to ease the squeeze on living standards.

  • Chart showing growth in pay

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Whatever form Brexit takes, we will keep inflation low and support the economy

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

A smooth Brexit means the UK and EU reach a deal and there is a period of time where businesses can adjust to the new relationship between the UK and the EU.

Negotiations about the future relationship between the UK and the EU are ongoing.

The path of the economy will depend on the outcome of those negotiations.

The nature of Brexit is likely to affect spending. People might spend more if they become more confident about their future income, or they could spend less if they think Brexit will make them worse off.

Brexit could also affect companies’ ability to supply goods and services. For example, there could be delays at the border or disruption to supply chains if businesses are not given enough time to adjust to the new relationship between the UK and the EU.

Brexit could also affect the value of the pound depending on how people in financial markets respond to the type of Brexit.

How we set interest rates in response to Brexit will depend on the balance of its effects on demand, supply, and the value of the pound.

The nature of Brexit will affect the UK economy. But whatever happens, we will set interest rates to keep inflation low and support jobs and growth.

UK and EU flags

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

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