Monetary Policy Report - November 2019

Our quarterly Monetary Policy Report sets out the economic analysis and inflation projections that the Monetary Policy Committee uses to make its interest rate decisions.

In a nutshell

The interest rate decision

We set to influence spending in the economy to ensure (the pace of price rises) returns to our 2% target sustainably.

Low and stable inflation supports jobs and growth.

Over the past decade, our economy has needed interest rates to stay very low.

Recently, the UK economy has slowed as firms’ uncertainties about Brexit have become entrenched and growth in the world economy has slowed. UK inflation has fallen back to just below our 2% target. This month we have kept interest rates unchanged.

With the risk of a no-deal Brexit falling recently, we expect the uncertainty facing households and businesses to fall. We also expect global growth to recover gradually. These developments should help growth here in the UK.

If that does not happen, then we may need to lower interest rates to support UK growth and ensure that we return inflation to our 2% target sustainably.

If the economy develops as we expect, then upward pressure on prices should build gradually over the next few years. In that case, we think a modest increase in interest rates is likely to be needed to keep inflation at our 2% target.

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Growth has slowed in the UK and abroad

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

Looking through those ups and downs, growth has slowed.

We expect growth this year to be roughly half that in 2018.

That is partly because growth in other countries has also slowed.

Lower growth elsewhere has reduced the demand for the goods and services that the UK sells abroad.

Inflation dial

Growth has slowed in the UK and abroad

  • Average quarterly GDP growth (%)
  • Global growth (% yearly change)

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Inflation is a little below our 2% target

Inflation is currently just below our 2% target.

We expect it to fall further below target next year partly because of lower .

After that, we expect inflation to rise gradually to a little above our target.

One factor contributing to that rise 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.

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.

Dial

Inflation is a little below our 2% target

  • Average weekly pay before tax excluding bonuses, adjusted for changes in prices

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Brexit uncertainty has been high

Uncertainty about the outcome of Brexit helps explain why UK growth has slowed.

Uncertainty encourages businesses to delay spending on things like new machinery.

We think that uncertainty about Brexit is the main reason why by companies has been falling.

The Office for National Statistics estimates that business investment fell over the past year. Before the EU referendum, business investment was growing by around 5% per year.

Spending by households has also slowed but less sharply. Household spending has been supported by high employment.

With the risk of a no-deal Brexit falling recently, we expect the uncertainty facing households and businesses to fall.

UK and EU flags

Brexit uncertainty has been high

  • Business investment growth (% yearly change)

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If growth stays weak, interest rates could fall. If growth recovers as expected, rates may need to rise

We expect the uncertainty facing households and businesses to fall. We also expect global growth to recover.

If that does not happen, then we may need to lower interest rates to support UK growth and ensure that we return inflation to our 2% target sustainably.

If the economy develops as we expect, then upward pressure on prices should build gradually over the next few years.

In that case, we think a modest increase in interest rates is likely to be needed to keep inflation at our 2% target.

Percentage sign

If growth stays weak, interest rates could fall. If growth recovers as expected, rates may need to rise.

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