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 exports. Second, investment 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.
The Interest Rate Decision
Our role is to set interest rates to influence the amount of spending in the economy in order to ensure inflation (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.
(Free) Via - The Bank of England
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