Smoothing the economic adjustment in wake of larger forces
by Phil Eckersley, Bank of England Agent for the South East and East Anglia
One word that crops up often in discussions I’ve been having with businesses in the South-East and East Anglia over recent months is ‘uncertainty’.
Evidence from a range of measures that the Bank looks at suggests uncertainty has been higher than normal since June’s referendum on the UK’s membership of the European Union.
Despite that, the economy has continued to perform more strongly than many – including the Bank of England – had expected.
For some contacts I talk to – especially at smaller companies – this will come as little surprise: many of them are simply getting on with doing business for the time being.
The same can be said of many households. After all, unemployment levels are low – here in the region more people are in work than ever before – and wages are growing modestly, but faster than inflation. For those looking to borrow, credit is generally readily available and competitively priced.
And following the Bank’s decision to reduce interest rates in August, mortgage payments have come down for many households. Businesses have also seen the cost of borrowing fall. But those businesses will only invest if they are confident about the outlook. And, as I said earlier, some tell us they remain quite cautious.
A survey carried out by the Bank’s network of regional agents and completed by many companies here in SE&EA suggests investment by companies will be at best stable or maybe a bit lower in the year ahead. One reason for that is the uncertainty over how they might be affected by Brexit. For example, what will it mean for their ability to export their products?
The fall in the value of the pound over recent months also partly reflects concerns about the same issue. An important consequence of that fall is that the cost of imported goods will increase. And we consume a lot of things here in the UK that are imported.
That will push up prices in the shops for us all, which might impact how much we buy. As a result the Bank’s policymakers think that the outlook for growth might be weaker in two or three years’ time, despite the stronger than expected performance next year.
Faced with a period of inflation above its two per cent target, the Bank might be expected to increase interest rates. But that period will be temporary. And it is expected to happen alongside modest growth and rising unemployment.
The Bank has therefore decided to leave its interest rate unchanged at 0.25 per cent. But it has said that policy could respond in either direction, depending on how inflation and growth prospects develop.
In uncertain times, what can the Bank of England do? It is true that our policies alone can’t deliver prosperity, but we can lay the foundations for it.
By targeting sustainable, low inflation, we aim to smooth the process of adjustment, stabilising growth and supporting jobs in the wake of much larger forces.