Visual summary - Inflation Report May 2019

The outlook for the economy

In a nutshell

The UK economy is growing but not quickly

Inflation is close to our 2% target

Future interest rate rises should be gradual and limited

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 and global economic growth has been subdued, 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 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.

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: How Bank Rate has changed over time

Back to top

The UK economy is growing but not quickly

The Office for National Statistics estimates that the size of the UK economy increased by 0.3% in the three months to February, a similar rate of growth to the previous three months.

That growth rate is relatively subdued, it is around half the rate of growth seen on average over the past five years.

Economic growth in other countries slowed in 2018. That has reduced the demand for our , and is one reason why the UK economy is growing at a slower pace.

But spending by companies and households has also weakened.

by businesses fell in 2018, and has been soft since the EU referendum. Responses by businesses to surveys conducted by the Bank of England and other organisations suggest this is mainly because of uncertainty about Brexit. While businesses have been investing less, overall they have continued to hire people.

Spending by households has been more resilient, rising 1.7% in 2018. Spending is still weaker than average annual growth of 2.3% over the past five years.

The UK economy is growing but not quickly

  • Chart: Yearly percentage change in business investment growth
  • Chart: Change since the start of 2018

Back to top

Inflation is 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.

Most of the increase in inflation due to the fall in the pound has now happened.

Because of this, inflation is now back close to our 2% target.

We expect inflation to be below the target later this year partly because of lower household gas prices. But this effect is unlikely to persist.

Inflation is close to our 2% target

  • Chart: Percentage change in inflation rate

Back to top

Future interest rate rises should be gradual and limited

We expect upward pressure on prices to build over the next few years.

The faster rate of pay growth should contribute to this.

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

The Office for National Statistics reports that pay increased by 3.4% in the three months to February 2019 compared to the previous year. This is faster growth than in recent years, and is also faster than the rise in prices, which should begin to ease the squeeze on living standards. Pay is still not rising as much as it did before the financial crisis, however.

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

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

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.

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

  • Chart: Yearly percentage change of pay growth, excluding bonuses

Back to top

Whatever form Brexit takes, we will keep inflation low 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.

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

The path of the economy will depend on the outcome of Brexit.

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

It could also affect companies’ ability to supply goods and services. For example, there may be delays at the border or disruption to 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 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.

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

Was this page useful?
Add your details...