Inflation Report May 2019 BANK OF ENGLAND
Inflation Report May 2019
BANK OF ENGLAND Inflation Report May 2019 In order to maintain price stability, the Government has set the Bank's Monetary Policy Committee(MPC) a target for the annual inflation rate of the Consumer Prices Index of 2 Subject to that, the MPC is also required to support the Government's economic policy ncluding its objectives for growth and employment The Inflation Report is produced quarterly by Bank staff under the guidance of the members of the Monetary Policy Committee. It serves two purposes. First, its preparation provides a comprehensive and forward-Looking framework for discussion among MPC members as an aid to our decision-making. Second, its publication allows us to share our thinking and explain the reasons for our decisions to those whom they affect. Although not every member will agree with every assumption on which our projections are based, the fan charts represent the MPCs best collective judgement about the most likely paths for inflation, output and unemployment, as well as the uncertainties surrounding those centra projections. This Report has been prepared and published by the Bank of England in accordance with section 18 of the Bank of England Act 1998 The Monetary Policy Committee Mark Carney, Governor ben Broadbent, Deputy Governor responsible for monetary policy Jon Cunliffe, Deputy Governor responsible for financial stability Dave Ramsden, Deputy Governor responsible for markets and banking Andrew Haldane Jonathan Haskel Michael Saunders Silvana Tenreyro Gentian vlieghe y回f Power Point TM versions of the Inflation Report charts and Excel spreadsheets of the data underlying most of them are available at www.bankofengland.co.uk/inflation-report/2019/may-2019 o Bank of England 2019 ISSN 2514-4103(Online)
In order to maintain price stability, the Government has set the Bank’s Monetary Policy Committee (MPC) a target for the annual inflation rate of the Consumer Prices Index of 2%. Subject to that, the MPC is also required to support the Government’s economic policy, including its objectives for growth and employment. The Inflation Report is produced quarterly by Bank staff under the guidance of the members of the Monetary Policy Committee. It serves two purposes. First, its preparation provides a comprehensive and forward-looking framework for discussion among MPC members as an aid to our decision-making. Second, its publication allows us to share our thinking and explain the reasons for our decisions to those whom they affect. Although not every member will agree with every assumption on which our projections are based, the fan charts represent the MPC’s best collective judgement about the most likely paths for inflation, output and unemployment, as well as the uncertainties surrounding those central projections. This Report has been prepared and published by the Bank of England in accordance with section 18 of the Bank of England Act 1998. The Monetary Policy Committee: Mark Carney, Governor Ben Broadbent, Deputy Governor responsible for monetary policy Jon Cunliffe, Deputy Governor responsible for financial stability Dave Ramsden, Deputy Governor responsible for markets and banking Andrew Haldane Jonathan Haskel Michael Saunders Silvana Tenreyro Gertjan Vlieghe PowerPoint™ versions of the Inflation Report charts and Excel spreadsheets of the data underlying most of them are available at www.bankofengland.co.uk/inflation-report/2019/may-2019 © Bank of England 2019 ISSN 2514-4103 (Online) Inflation Report May 2019
Contents Monetary Policy Summary 1 Global developments and domestic financial conditions 1.1 Global economic developments 1.2 Domestic financial conditions 1125 Box 1 Monetary policy since the February Report Box 2 Recent developments in new mortgage rates 6 2 Demand and output 2.1 Near-term outlook 2.2 Demand and the impact of Brexit-related uncertainties Box 3 Stockbuilding and its implications for the near-term growth outlook 7—7812 Box 4 The housing market and its impact on GDP Box 5 Agents' update on business conditions 3 Supply and spare capacity 3.1 Labour market: developments and prospects 16 3. 2 The outlook for potential supply 4 Costs and prices 4.1 Consumer price developments and the near-term outlook 4.2 Energy and import prices 4.3 Domestic cost pressures 22 4.4 Inflation expectations 5 Prospects for inflation 5.1 The MPCs key judgements and risks 5.2 The projections for demand, unemployment and inflation Box 6 How has the economy evolved relative to the February 2018 Report? Box 7 Other forecasters' expectations 38 Glossary and other information
Monetary Policy Summary i 1 Global developments and domestic financial conditions 1 1.1 Global economic developments 1 1.2 Domestic financial conditions 2 Box 1 Monetary policy since the February Report 5 Box 2 Recent developments in new mortgage rates 6 2 Demand and output 7 2.1 Near-term outlook 7 2.2 Demand and the impact of Brexit-related uncertainties 8 Box 3 Stockbuilding and its implications for the near-term growth outlook 11 Box 4 The housing market and its impact on GDP 12 Box 5 Agents’ update on business conditions 14 3 Supply and spare capacity 16 3.1 Labour market: developments and prospects 16 3.2 The outlook for potential supply 18 4 Costs and prices 20 4.1 Consumer price developments and the near-term outlook 20 4.2 Energy and import prices 21 4.3 Domestic cost pressures 22 4.4 Inflation expectations 23 5 Prospects for inflation 25 5.1 The MPC’s key judgements and risks 28 5.2 The projections for demand, unemployment and inflation 33 Box 6 How has the economy evolved relative to the February 2018 Report? 34 Box 7 Other forecasters’ expectations 38 Glossary and other information 39 Contents
Monetary Policy Summary 2% inflation target, and in a way that helps to sustain growth and employment At lf tthe The Bank of Englands Monetary Policy Committee(MPC) sets monetary policy to me neeting ending on 1 May 2019, the MPC voted unanimously to maintain Bank Rate at 0.75% The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central banl reserves, at E10 billion the Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves,at f435 billi Ion The Committee's updated projections for activity and inflation are set out in the accompanying May Inflation Report They assume a smooth adjustment to the average of a range of possible outcomes for the United Kingdoms eventual trading relationship with the European Union. They are also conditioned on a path for Bank Rate that rises to around 1% by the end of the forecast period, lower than in the February Report. As with UK financial conditions more generally, that path has been heavily influenced by recent global developments, with forward interest rates in the United States and the euro area falling markedly The MPC has noted previously that UK data could be unusually volatile in the near term, due to shifting expectations about Brexit in financial markets and among households and businesses. GDP is expected to have grown by 0.5% in building stocks ahead ofrecen ger-than-expected boost from companies in the United Kingdom and the European Union 2019 Q1, in part reflecting a Brexit deadlines That boost is expected to be temporary, however, and quarterly growth is expected to slow to around 0.2% in Q2 Smoothing through those developments, the underlying pace of GDP growth appears to be slightly stronger than previously anticipated, but marginally below potential. That subdued pace reflects the impact of the slowdown in global growth and ongoing Brexit uncertainties. The latter is having a particularly pronounced impact on business investment, which has been falling for a year. The MPC judges that there is currently a small margin of excess supply in econo In the MPC's central projection, global growth stabilises around its potential rate and Brexit uncertainties subside gradually. Four-quarter UK GDP growth begins to pick up next year and rises to over 2% by the end of the forecast period. Business investment recovers and household spending continues to support demand growth, sustained by rising real incomes. GDP growth picks up above the subdued pace of potential supply growth, such that excess demand begins to build. Excess demand rises above 1% of potential output by the end of the forecast period, notably higher than in the February Report, reflecting the support to demand provided by lower market interest rates and easier financial conditions more generally CPI inflation was 1.9% in March and is expected to be slightly further below the MPCs 2% target during the first half of the forecast period, largely reflecting lower expected retail energy prices. The labour market remains tight, with the unemployment rate projected to decline to 31% by the end of the forecast period. Annual pay growth has remained around 312% and unit labour cost growth has strengthened to rates that are above historical averages. As excess demand emerges, domestic inflationary pressures are expected to firm, such that CPI inflation picks up to above the 2% target in two years'time and is still rising at the end of the three-year forecast period The Committee continues to judge that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. The MPC judges at this meeting that the current stance of monetary policy is appropriate
Inflation Report May 2019 Monetary Policy Summary i Monetary Policy Summary The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 1 May 2019, the MPC voted unanimously to maintain Bank Rate at 0.75%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion. The Committee’s updated projections for activity and inflation are set out in the accompanying May Inflation Report. They assume a smooth adjustment to the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union. They are also conditioned on a path for Bank Rate that rises to around 1% by the end of the forecast period, lower than in the February Report. As with UK financial conditions more generally, that path has been heavily influenced by recent global developments, with forward interest rates in the United States and the euro area falling markedly. The MPC has noted previously that UK data could be unusually volatile in the near term, due to shifting expectations about Brexit in financial markets and among households and businesses. GDP is expected to have grown by 0.5% in 2019 Q1, in part reflecting a larger-than-expected boost from companies in the United Kingdom and the European Union building stocks ahead of recent Brexit deadlines. That boost is expected to be temporary, however, and quarterly growth is expected to slow to around 0.2% in Q2. Smoothing through those developments, the underlying pace of GDP growth appears to be slightly stronger than previously anticipated, but marginally below potential. That subdued pace reflects the impact of the slowdown in global growth and ongoing Brexit uncertainties. The latter is having a particularly pronounced impact on business investment, which has been falling for a year. The MPC judges that there is currently a small margin of excess supply in the economy. In the MPC’s central projection, global growth stabilises around its potential rate and Brexit uncertainties subside gradually. Four-quarter UK GDP growth begins to pick up next year and rises to over 2% by the end of the forecast period. Business investment recovers and household spending continues to support demand growth, sustained by rising real incomes. GDP growth picks up above the subdued pace of potential supply growth, such that excess demand begins to build. Excess demand rises above 1% of potential output by the end of the forecast period, notably higher than in the February Report, reflecting the support to demand provided by lower market interest rates and easier financial conditions more generally. CPI inflation was 1.9% in March and is expected to be slightly further below the MPC’s 2% target during the first half of the forecast period, largely reflecting lower expected retail energy prices. The labour market remains tight, with the unemployment rate projected to decline to 3½% by the end of the forecast period. Annual pay growth has remained around 3½% and unit labour cost growth has strengthened to rates that are above historical averages. As excess demand emerges, domestic inflationary pressures are expected to firm, such that CPI inflation picks up to above the 2% target in two years’ time and is still rising at the end of the three-year forecast period. The Committee continues to judge that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. The MPC judges at this meeting that the current stance of monetary policy is appropriate
Inflation Report May 2019 Monetary Policy Summary i The economic outlook will continue to depend significantly on the nature and timing of EU withdrawal, in particular: policy will depend on the balance of these effects on demand, supply and the exchange rate. the monetary poll the new trading arrangements between the European Union and the United Kingdom; whether the transition to them abrupt or smooth; and how households, businesses and financial markets respond. The appropriate path of monet response to Brexit, whatever form it takes, will not be automatic and could be in either direction. The Committee will always act to achieve the 2% inflation target
Inflation Report May 2019 Monetary Policy Summary ii The economic outlook will continue to depend significantly on the nature and timing of EU withdrawal, in particular: the new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond. The appropriate path of monetary policy will depend on the balance of these effects on demand, supply and the exchange rate. The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction. The Committee will always act to achieve the 2% inflation target