Economy Why has inflation stayed so subdued?
Where have the forecasters gone wrong? Why has inflation remained so subdued?
23 May 2019
Quarterly Economic Outlook
UK and Brexit
23 May 2019
Brexit-related hesitancy continues to hold down bank lending and investment
The BoE’s Monetary Policy Committee (MPC) decided to keep Bank Rate unchanged at 0.75% at its meetings on 7 February 2019 and 21 March 2019, and to keep the stock of outstanding government and corporate bond purchases unchanged at £445 billion (comprised of £435 billion in government bonds and £10 billion is corporate bonds).
Until the uncertainties of the Brexit crisis are resolved it seems unlikely that the BoE will embark on any new initiatives in monetary policy. Despite having given clear signs last year that interest rates would be rising in 2019, the BoE’s Governor, Mark Carney, and the MPC members have been compelled by economic weakness to postpone any thought of tightening or normalising action in the sphere of monetary policy.
Meantime, money and credit growth - the fuel for spending growth in the economy - have been slowing: M4x, or money held by households and businesses, slowed from 7.4% year-on-year in April 2017 to 2.0% in February 2019, mostly driven by slower bank lending which decelerated from 6.1% in April 2017 to as low as 0.8% in August 2018, and has averaged a low 2.4% year-on-year over the six months August 2018 to February 2019. Brexit or no Brexit, these low growth rates will almost certainly result in very low inflation over the next year or two.
In normal times such low growth rates would have been ringing alarm bells in policy circles, prompting urgent corrective action. However, the political and economic forces unleashed by the Brexit saga are such that the BoE is unable to turn things around on its own. Having played the primary role in restoring the British economy to growth after the slump of 2008-09, monetary policy has had to play second fiddle to the policy-makers in Downing Street and Westminster since the referendum.
Consumer and business confidence and hence the rates of growth of spending in the economy have been knocked back severely by the on-going uncertainties of the tussle between London and Brussels over the future of the UK after Brexit. Consequently it is only feasible to forecast a meagre 1.3% real GDP growth for the year, well below the long-term potential growth rate of the economy.
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