UK Central Bank Statement

Author: | Published: 19 Oct 2018
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In the exceptional circumstances prevailing since the referendum, the MPC has set policy to balance the trade-off between the speed at which inflation returns to target and the support that monetary policy provides to jobs and activity.

Consistent with its remit, the MPC judged that it was appropriate to set policy so that inflation returned to its target over a longer period than the conventional horizon of 18-24 months in order to support jobs and activity at a time when uncertainty was elevated and the economy was slowing.

That approach has worked. Employment is at a record high. Import price inflation is fading. Real wages are rising. And domestic inflationary pressures are gradually building to rates consistent with the inflation target.

Now, with the excess supply in the economy virtually used up and the Brexit date looming, the economy could travel along two broad paths: one relatively bumpy, the other – my focus here – relatively smooth.

The current path is consistent with the MPC's current central projection, which assumes a relatively smooth transition to a Brexit that is the average of a range of outcomes. In this case, the Committee's reaction function will be more conventional, with the path of policy driven primarily by demand.

As the MPC has stressed, were the economy to develop broadly in line with the May Inflation Report projections – with demand growth exceeding the 1½% estimated rate of supply growth leading to a small margin of excess demand emerging by early 2020 and domestic inflationary pressures continuing to build gradually to rates consistent with the 2% target – an ongoing tightening of monetary policy over the next few years would be appropriate to return inflation sustainably to its target at a conventional horizon.

Since our May meeting, international data have been mixed. The US economy is growing robustly, against signs that momentum has faded a little in the euro area and, more markedly, in some emerging market economies. As I noted earlier, the impact of trade uncertainty on business confidence and financial conditions at this stage still appears to be modest. Overall, the outlook for global growth has moderated a little, but remains strong, providing important support to UK activity.

Domestically, the incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate. A number of indicators of household spending and sentiment have bounced back strongly from what increasingly appears to have been erratic weakness in Q1. The UK labour market has remained strong, and there is widespread evidence that slack is largely used up. Pay and domestic cost growth have continued to firm broadly as expected. Headline inflation is still expected to rise in the short term because of higher energy prices.

Overall, recent domestic data suggest the economy is evolving largely in line with the May Inflation Report projections, which see demand growing at rates slightly above those of supply and domestic cost pressures building. The MPC will continue to monitor incoming data and review prospects for growth and inflation in the UK in order to set monetary policy consistent with returning inflation sustainably to target.

This is an excerpt from the From Protectionism to Prosperity speech given by Mark Carney, Governor of the Bank of England, at the Northern Powerhouse Business Summit – Great Exhibition of the North, July 5 2018. The full speech with accompanying charts can be freely accessed at