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
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
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