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
Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 1 1 Global developments and domestic financial conditions Global growth slowed over 2018, but appears to have stabilised in recent months. There has beer a shift in the policy outlook in major economies and an associated easing in global financial conditions, which is expected to support glo obal growth In the UK, the market path for interest rates is lower as in other advanced economies, while sterling has appreciated a little Chart 1.1 The slowdown in global growth has been broad-based 1.1 Global economic development Four-quarter UK-weighted GDP growth(a) There was a broad-based slowing in global GDP growth over 2018 across advanced and emerging market economies Emerging market economies (Chart 1.1). UK-weighted world GDP growth appears to have stabilised in 2019 Q1, with quarterly growth expected to have increased to 0.6%(Table 1.A), higher than projected at the time of the February Report US GDP growth picked up to 0.8% in 2019 Q1, euro-area growth rose to 0. 4%, while growth in China was 1.4% The slowdown in global growth in part reflects a tightening financial conditions during 2017-18, as asset prices adjusted to Eikon from Relinitiy IMF W tighter policy, especially in the US and China. It may also using data for real GDP growth rates for reflect the imposition of trade barriers, such as tariffs on trade between the US and China, which may have contributed to weaker business confidence and a slowdown in world trade growth(Chart 1. 2). In advanced economies, the slowdown in wth has been concentrated in investment and net trade (Chart 1.3) Table 1.A Global GDP growth appears to have stabilised 2019Q1 Higher-frequency indicators suggest that UK-weighted global GDP in selected countries and GDP growth will be around 0.5% in 2019 Q2. Global Percentage changes on a quarter earlier manufacturing and export order PMls stabilised in 2019 Q1, uarterly averages having fallen over 2018, for example 1998 20142016 2007131 H1 Q3 Q4 Against the backdrop of weak data, there has been a shift in United Kingdom 0.7 0s 0.7040.4 0.2 0/0.z na the policy outlook in some major economies, with monetary Euro area(39%) policy in particular now expected to be looser than previously United States(18%) 070.506050.608080.50. China(4%)(b) 251917171616161514 expected( Chart14) India(1%) In the euro area, the European Central Bank(ECB)an Russia( 1%)(e) L9 OS 0 4 0303 07 0.7 08 na that policy rates are expected to remain at present levels at 0.806 -0.7-060602 05 01 na least until the end of 2019, longer than stated in its guidance K-weighted world GDP(0.7 0.4 0.60.6 0.7 0.6 0.40.4 0.6 at the time of the February Report. To help support bank lending conditions and the smooth transmission of monetary Sources Eikon from Refinitiv, IMF WEO, Nationa Bureau of Statistics of China, OECD, ONS and policy, the ECB also announced further two-year targeted longer-term refinancing operations, to be offered from 2019 Q3 to 2021 Q1. The market path for policy rates in the defined in footnote (a)of 1. Figure for 2019 Q1 is a Bank staff projection. euro area slopes upwards, but gently
Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 1 1 Global developments and domestic financial conditions • Global growth slowed over 2018, but appears to have stabilised in recent months. There has been a shift in the policy outlook in major economies and an associated easing in global financial conditions, which is expected to support global growth. • In the UK, the market path for interest rates is lower as in other advanced economies, while sterling has appreciated a little. 1.1 Global economic developments There was a broad-based slowing in global GDP growth over 2018 across advanced and emerging market economies (Chart 1.1). UK-weighted world GDP growth appears to have stabilised in 2019 Q1, with quarterly growth expected to have increased to 0.6% (Table 1.A), higher than projected at the time of the February Report. US GDP growth picked up to 0.8% in 2019 Q1, euro-area growth rose to 0.4%, while growth in China was 1.4%. The slowdown in global growth in part reflects a tightening in financial conditions during 2017–18, as asset prices adjusted to tighter policy, especially in the US and China. It may also reflect the imposition of trade barriers, such as tariffs on trade between the US and China, which may have contributed to weaker business confidence and a slowdown in world trade growth (Chart 1.2). In advanced economies, the slowdown in growth has been concentrated in investment and net trade (Chart 1.3). Higher-frequency indicators suggest that UK-weighted global GDP growth will be around 0.5% in 2019 Q2. Global manufacturing and export order PMIs stabilised in 2019 Q1, having fallen over 2018, for example. Against the backdrop of weak data, there has been a shift in the policy outlook in some major economies, with monetary policy in particular now expected to be looser than previously expected (Chart 1.4). In the euro area, the European Central Bank (ECB) announced that policy rates are expected to remain at present levels at least until the end of 2019, longer than stated in its guidance at the time of the February Report. To help support bank lending conditions and the smooth transmission of monetary policy, the ECB also announced further two-year targeted longer-term refinancing operations, to be offered from 2019 Q3 to 2021 Q1. The market path for policy rates in the euro area slopes upwards, but gently. 6 4 2 0 2 4 6 8 10 2000 03 06 09 12 15 18 Advanced economies Emerging market economies Per cent + – Chart 1.1 The slowdown in global growth has been broad-based Four-quarter UK-weighted GDP growth(a) Sources: Eikon from Refinitiv, IMF World Economic Outlook (WEO) and Bank calculations. (a) Constructed using data for real GDP growth rates for 180 countries weighted according to their shares in UK exports. Table 1.A Global GDP growth appears to have stabilised in 2019 Q1 GDP in selected countries and regions(a) Percentage changes on a quarter earlier Quarterly averages 1998– 2012– 2014– 2016 2017 2018 2018 2018 2019 2007 13 15 H1 Q3 Q4 Q1 United Kingdom 0.7 0.5 0.7 0.4 0.4 0.2 0.7 0.2 n.a. Euro area (39%) 0.6 0.0 0.4 0.5 0.7 0.4 0.1 0.2 0.4 United States (18%) 0.7 0.5 0.6 0.5 0.6 0.8 0.8 0.5 0.8 China (4%)(b) 2.5 1.9 1.7 1.7 1.6 1.6 1.6 1.5 1.4 Japan (2%) 0.3 0.4 0.1 0.3 0.6 0.2 -0.6 0.5 n.a. India (1%) 1.8 1.6 1.7 1.9 1.9 1.7 1.3 1.7 n.a. Russia (1%)(c) 1.9 0.5 -0.4 0.3 0.3 0.7 0.7 0.8 n.a. Brazil (1%) 0.8 0.6 -0.7 -0.6 0.6 0.2 0.5 0.1 n.a. UK-weighted world GDP(d) 0.7 0.4 0.6 0.6 0.7 0.6 0.4 0.4 0.6 Sources: Eikon from Refinitiv, IMF WEO, National Bureau of Statistics of China, OECD, ONS and Bank calculations. (a) Real GDP measures. Figures in parentheses are shares in UK exports in 2017. (b) The 1998–2007 average for China is based on OECD estimates. Estimates for 2008 onwards are from the National Bureau of Statistics of China. (c) The earliest observation for Russia is 2003 Q2. (d) As defined in footnote (a) of Chart 1.1. Figure for 2019 Q1 is a Bank staff projection
Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 2 Chart 1. 2 Growth of world trade in goods has slowed sharply In the US, the Federal Open Market Committee made no and business confidence has fallen changes to its target range for the federal funds rate in March OECD business confidence and world trade in goods It the path of policy rates implied by market prices has ndec1998-2019=100 declined further over the past three months and is markedly lower than in November. It is now downward sloping, suggesting that market participants view a cut in the policy rate as more likely than an increase in coming years. The Committee also announced an end to the reduction in its balance sheet by September 2019 business confiden In China, the authorities announced further fiscal measures to ight-hand scale) upport activity, including significant cuts in taxes and increases in infrastructure expenditure. The latest fiscal measures, alongside a previous easing in monetary and credit or Econamic Policy Analysis, OECD and Bank calculations. policies, should provide support to demand (a) Three-month moving average. Volume measure. Lower expectations for the path of policy rates have contributed to a rise in global risky asset prices, reversing weakness at the end of 2018. Equity prices internationally Chart 1.3 The slowdown in advanced-economy growth has been have risen since February(Chart 1. 5)-the S&P 500 had its concentrated in investment and net trade strongest quarter for almost 10 years for example -and Contributions to four-quarter GDP growth in the G7 economies(a) corporate bond spreads have narrowed further(Chart 1.6) Percentage points As a result, global financial conditions have loosened since February GDP growth Financial market-based measures of investor uncertainty, such as the vIX measure of implied equity price volatility, have fallen back to below historical averages. Other measures of uncertainty paint a different picture, however. The Baker, Bloom and Davis index of global policy uncertainty, which ncludes media references to uncertainty and other indicators such as the dispersion of professional forecasts, remains elevated(Chart 1.7) Eikon by Relinitiv, IMF WEO, OECD and Bank calculations. In the MPC's central projection, the easing in global financial conditions, as well as previously announced tariff increases on US-China trade not being implemented, are expected provide support to global growth. Four-quarter UK-weighted Chart 1. 4 Market-implied paths for interest rates have fallen GDP growth is expected to trough in Q2 before recovering markedly somewhat in 2019 H2 and settling around trend rates. The International forward interest rates(a) projection is a little higher than at the time of the February Solid lines: May 2019 F Dashed lines: February 2019 Dotted lines November 2018 1.2 Domestic financial conditions deal funds ratel) ted Kingdom As in other countries, UK short and longer-term interest rates have fallen and equity prices have risen since February Credit conditions facing corporates have loosened a little as corporate bond spreads have narrowed, while those facing households have remained generally favourable. Sterling ha 2016 appreciated a little ources Bloomberg Finance L.P. and Bank calculations. Market interest rates and sterling November 2018 curves are estimated using instantaneous onward overnight index swap rates in the 151 The market-implied path of Bank Rate over the next three years is, on average, around 15 basis points lower than in
Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 2 In the US, the Federal Open Market Committee made no changes to its target range for the federal funds rate in March. But the path of policy rates implied by market prices has declined further over the past three months and is markedly lower than in November. It is now downward sloping, suggesting that market participants view a cut in the policy rate as more likely than an increase in coming years. The Committee also announced an end to the reduction in its balance sheet by September 2019. In China, the authorities announced further fiscal measures to support activity, including significant cuts in taxes and increases in infrastructure expenditure. The latest fiscal measures, alongside a previous easing in monetary and credit policies, should provide support to demand. Lower expectations for the path of policy rates have contributed to a rise in global risky asset prices, reversing weakness at the end of 2018. Equity prices internationally have risen since February (Chart 1.5) — the S&P 500 had its strongest quarter for almost 10 years for example — and corporate bond spreads have narrowed further (Chart 1.6). As a result, global financial conditions have loosened since February. Financial market-based measures of investor uncertainty, such as the VIX measure of implied equity price volatility, have fallen back to below historical averages. Other measures of uncertainty paint a different picture, however. The Baker, Bloom and Davis index of global policy uncertainty, which includes media references to uncertainty and other indicators such as the dispersion of professional forecasts, remains elevated (Chart 1.7). In the MPC’s central projection, the easing in global financial conditions, as well as previously announced tariff increases on US-China trade not being implemented, are expected to provide support to global growth. Four-quarter UK-weighted GDP growth is expected to trough in Q2 before recovering somewhat in 2019 H2 and settling around trend rates. The projection is a little higher than at the time of the February Report. 1.2 Domestic financial conditions As in other countries, UK short and longer-term interest rates have fallen and equity prices have risen since February. Credit conditions facing corporates have loosened a little as corporate bond spreads have narrowed, while those facing households have remained generally favourable. Sterling has appreciated a little. Market interest rates and sterling The market-implied path of Bank Rate over the next three years is, on average, around 15 basis points lower than in 98 99 100 101 102 2 1 0 1 2 3 4 5 6 2012 13 14 15 16 17 18 19 Index: 1998–2019 = 100 Percentage change on a year earlier OECD business confidence (left-hand scale) World trade in goods(a) (right-hand scale) + _ Chart 1.2 Growth of world trade in goods has slowed sharply and business confidence has fallen OECD business confidence and world trade in goods Sources: CPB Netherlands Bureau for Economic Policy Analysis, OECD and Bank calculations. (a) Three-month moving average. Volume measure. 1 0 1 2 3 2012 13 14 15 16 17 18 Percentage points Net trade GDP growth (per cent) Other spending Household consumption Investment + – Chart 1.3 The slowdown in advanced-economy growth has been concentrated in investment and net trade Contributions to four-quarter GDP growth in the G7 economies(a) Sources: Eikon by Refinitiv, IMF WEO, OECD and Bank calculations. (a) Growth in real purchasing power parity (PPP)-weighted GDP. Solid lines: May 2019 Dashed lines: February 2019 Dotted lines: November 2018 Federal funds rate(b) 1.0 0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Per cent + – United Kingdom Euro area United States ECB deposit rate ECB main refinancing rate 2016 18 20 22 Bank Rate Chart 1.4 Market-implied paths for interest rates have fallen markedly International forward interest rates(a) Sources: Bloomberg Finance L.P. and Bank calculations. (a) The May and February 2019 and November 2018 curves are estimated using instantaneous forward overnight index swap rates in the 15 working days to 24 April 2019, 30 January 2019 and 24 October 2018 respectively. (b) Upper bound of the target range
Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 3 Table 1.B Monitoring the MPC's key judgements February, and is now expected to reach around 1.0% in three Developments anticipated in February Developments now anticipated during years'time( Chart 1.4). Longer-term UK interest rates are also during 2019 Q1-2019 Q3 2019Q2-2019Q4 lower: the yield on 10-year UK government bonds has declined Advanced economies Revised up slightly to 1.2%from 1.3%. Combined with the moves in the run-up to artery euro-area GDP growth to artery euro-area GDP growth to the February Report, both short and long-term interest rates verage a little above y% have fallen by around 40 basis points since November verage v% badly unchanged The sterling ERI has been sensitive to Brexit developments It Indicators of activity consistent with has appreciated by 1v2% since the February Report, which market contacts attribute to a lower probability being GDP growth in China 4 % within that, GDP growth in China verage around 6%. attached to a no-deal Brexit. The sterling ERI remains around The exchange rate and commodity prices Revised up 15% below its November 2015 peak( Chart 1.8) Ling ERI .US dollar oil prices are 18% higher. The sterling ERI is% higher Commodity Following the extension to the negotiation period for the with the conditioning assumptions UK's withdrawal from the EU, sterling implied volatilities set out in this Report. an indicator of uncertainty around the outlook for the Cost of cre Mortgage spreads to widen a little. exchange rate-fell sharply and the cost of insuring against a Mortgage spreads to widen a little Large depreciation relative to a large appreciation also fell,as Chart 1.5 Equity prices have risen since February market participants appear to be pricing in a lower probability Equity prices in advanced economies and emerging markets a) of a sharp fall in sterling over the next six months. Indices 4 January 2016=100 Credit conditions facing companies and households Over the past few years, credit conditions facing companie have been relatively accommodative. However, conditions corporate bond markets-which large companies use to borrow-deteriorated at the end of 2018. Bond spreads across the main markets in which UK companies borrow dices 4 January 2016=100 widened markedly(Chart 1. 6). These spreads have since narrowed, driven by the same factors that eased financial conditions globally(Section 1.1). UK corporate bond issuance has resumed, although it remained below its historical average in 2019 Q1 with most issuance concentrated among investment-grade companies According to the Credit Conditions Survey, the availability of () The Msa Inc declaimer of liability, which applies to the data provided, is avaRable here bank credit to companies has been little changed in recent quarters. However, reports from the Banks Agents suggest Chart 1.6 Corporate bond spreads have narrowed that the availability of credit has tightened for sectors that International non-financial corporate bond spreads(a) may be more exposed to Brexit, such as export-focused firms Investment-grade(E) ( eft-hand sca High-yield (E)(right-hand scale) Investment-grade(UsS)(left-hand scale) High-yield(USS)(right-hand scale) Investment-grade(Eceft-hand scale) High-yield (e (right-hand scale) The Credit Conditions Survey indicates that the demand for entage points corporate credit has remained subdued. Respondents to th Survey did, however, report an increase in the demand for inventory finance in Q1 and almost two thirds of respondents to the Lloyds Business Barometer survey in March reported that they were prepared for Brexit-related pressures on working capital. Supervisory intelligence suggests that, as yet, the banks accounting for the majority of lending to corporates have not reduced their willingness to provide working capital finance. The y of respondents to the Agents survey also reported no change in the availability and cost of Sourees Eikon from Refiniti. ICE/BoAML Global Research and Bank calculations working capital or trade finance in the past three months
Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 3 February, and is now expected to reach around 1.0% in three years’ time (Chart 1.4). Longer-term UK interest rates are also lower: the yield on 10-year UK government bonds has declined to 1.2% from 1.3%. Combined with the moves in the run-up to the February Report, both short and long-term interest rates have fallen by around 40 basis points since November. The sterling ERI has been sensitive to Brexit developments. It has appreciated by 1½% since the February Report, which market contacts attribute to a lower probability being attached to a no-deal Brexit. The sterling ERI remains around 15% below its November 2015 peak (Chart 1.8). Following the extension to the negotiation period for the UK’s withdrawal from the EU, sterling implied volatilities — an indicator of uncertainty around the outlook for the exchange rate — fell sharply. And the cost of insuring against a large depreciation relative to a large appreciation also fell, as market participants appear to be pricing in a lower probability of a sharp fall in sterling over the next six months. Credit conditions facing companies and households Over the past few years, credit conditions facing companies have been relatively accommodative. However, conditions in corporate bond markets — which large companies use to borrow — deteriorated at the end of 2018. Bond spreads across the main markets in which UK companies borrow widened markedly (Chart 1.6). These spreads have since narrowed, driven by the same factors that eased financial conditions globally (Section 1.1). UK corporate bond issuance has resumed, although it remained below its historical average in 2019 Q1 with most issuance concentrated among investment-grade companies. According to the Credit Conditions Survey, the availability of bank credit to companies has been little changed in recent quarters. However, reports from the Bank’s Agents suggest that the availability of credit has tightened for sectors that may be more exposed to Brexit, such as export-focused firms. The Credit Conditions Survey indicates that the demand for corporate credit has remained subdued. Respondents to the Survey did, however, report an increase in the demand for inventory finance in Q1 and almost two thirds of respondents to the Lloyds Business Barometer survey in March reported that they were prepared for Brexit-related pressures on working capital. Supervisory intelligence suggests that, as yet, the banks accounting for the majority of lending to corporates have not reduced their willingness to provide working capital finance. The majority of respondents to the Agents’ recent survey also reported no change in the availability and cost of working capital or trade finance in the past three months (Box 5). Developments anticipated in February during 2019 Q1–2019 Q3 Developments now anticipated during 2019 Q2–2019 Q4 Advanced economies Revised up slightly • Quarterly euro-area GDP growth to average ¼%. • Quarterly US GDP growth to average ½%. • Quarterly euro-area GDP growth to average a little above ¼%. • Quarterly US GDP growth to average ½%. Rest of the world Broadly unchanged • Indicators of activity consistent with four-quarter PPP-weighted emerging market economy growth of around 4¼%; within that, GDP growth in China to average around 6%. • Indicators of activity consistent with four-quarter PPP-weighted emerging market economy growth of around 4¼%; within that, GDP growth in China to average around 6%. The exchange rate and commodity prices Revised up • Commodity prices and the sterling ERI to evolve in line with the conditioning assumptions set out in this Report. • US dollar oil prices are 18% higher. The sterling ERI is 1.5% higher. Commodity prices and the sterling ERI to evolve in line with the conditioning assumptions set out in this Report. Cost of credit Broadly unchanged • Mortgage spreads to widen a little. • Mortgage spreads to widen a little. Table 1.B Monitoring the MPC’s key judgements 0 1 2 3 4 5 0 2 4 6 8 10 2016 17 18 19 February Report Percentage points Percentage points High-yield (US$) (right-hand scale) High-yield (€) (right-hand scale) High-yield (£) (right-hand scale) Investment-grade (US$) (left-hand scale) Investment-grade (£) (left-hand scale) Investment-grade (€) (left-hand scale) Chart 1.6 Corporate bond spreads have narrowed International non-financial corporate bond spreads(a) Sources: Eikon from Refinitiv, ICE/BoAML Global Research and Bank calculations. (a) Option-adjusted spreads on government bond yields. Investment-grade corporate bond yields are calculated using an index of bonds with a rating of BBB3 or above. High-yield corporate bond yields are calculated using aggregate indices of bonds rated lower than BBB3. Due to monthly index rebalancing, movements in yields at the end of each month might reflect changes in the population of securities within the indices. 70 80 90 100 110 120 130 140 150 160 170 2016 17 18 19 Indices: 4 January 2016 = 100 S&P 500 Euro Stoxx FTSE All-Share February Report Chart 1.5 Equity prices have risen since February Equity prices in advanced economies and emerging markets(a) Sources: Eikon from Refinitiv, MSCI and Bank calculations. (a) In local currency terms, except for MSCI Emerging Markets which is in US dollar terms. (b) The MSCI Inc. disclaimer of liability, which applies to the data provided, is available here. 70 80 90 100 110 120 130 140 150 160 170 2016 17 18 19 Indices: 4 January 2016 = 100 MSCI Emerging Markets(b) Shanghai Composite February Report
Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 4 Chart 1.7 Global policy uncertainty remains elevated Credit conditions facing households have generally remained Global policy uncertainty and implied volatility of US equity prices favourable Mortgage rates have been stable at low levels, Differences from averages since 20 despite large moves in spreads on banks'unsecured wholesale debt over the past six months. Box 2 discusses recent developments in mortgage rates s&P50 Policy uncertainty(b) There is some evidence of a tightening in household credit conditions in parts of the unsecured lending market while personal loan rates remain low(Table 1.C), respondents to the Credit Conditions Survey reported that the availability of unsecured credit tightened further in 2019 Q1 In the credit card market, interest-free periods on purchases and balance transfers have continued to fall: the maximum o% balance es Bloomberg Finance L P, policyuncertainty com a transfer period has fallen to below 30 months for the first time (a) viX measure of 30-day impied volatility of the S&P 500 equity index. Monthly since 2013. That tightening in credit supply is likely to have Quarterly Journalof! accounted for some of the slowing in consumer credit growth er2018. Chart 1.8 Sterling has risen a little since February erling ERI Index: 4 January 2016=100m10 Table 1.C Retail interest rates remain low Selected household quoted rates a April 2019 January (per cent) 2019 20 Two-year variable rate, 75% LTY 21 11 Two-year fixed rate, 60% LTV -5 133627 Two-year fixed rate, 75%LTV 22 Two-year fixed rate, 90% LTV 2.19 -4-1114-31 Two-year fixed rate, 95%LTV 2.96 82106 Consumer credit E10,000 personal loar 3.79 10 Credit card Deposits 0.4215212827 Cash ISA 255853 One-year fixed-rate bond One-year fixed-rate ISA 1.34 02345 Two-year fixed-rate bond 10420-28-1219 Two-year fixed-rate ISA www.benkofenplandco.ukstatistics/articles/2019/introduction-af-new-gupted-ates-data
Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 4 Credit conditions facing households have generally remained favourable. Mortgage rates have been stable at low levels, despite large moves in spreads on banks’ unsecured wholesale debt over the past six months. Box 2 discusses recent developments in mortgage rates. There is some evidence of a tightening in household credit conditions in parts of the unsecured lending market. While personal loan rates remain low (Table 1.C), respondents to the Credit Conditions Survey reported that the availability of unsecured credit tightened further in 2019 Q1. In the credit card market, interest-free periods on purchases and balance transfers have continued to fall; the maximum 0% balance transfer period has fallen to below 30 months for the first time since 2013. That tightening in credit supply is likely to have accounted for some of the slowing in consumer credit growth over 2018. 2 1 0 1 2 3 4 5 6 2002 04 06 08 10 12 14 16 18 S&P 500 (VIX)(a) Policy uncertainty(b) Differences from averages since 2002 (number of standard deviations) + – Chart 1.7 Global policy uncertainty remains elevated Global policy uncertainty and implied volatility of US equity prices Sources: Bloomberg Finance L.P., policyuncertainty.com and Bank calculations. (a) VIX measure of 30-day implied volatility of the S&P 500 equity index. Monthly averages. (b) See Baker, S R, Bloom, N and Davis, S J (2016), ‘Measuring economic policy uncertainty’, The Quarterly Journal of Economics. 70 80 90 100 110 2014 15 16 17 18 19 Index: 4 January 2016 = 100 February Report Chart 1.8 Sterling has risen a little since February Sterling ERI Table 1.C Retail interest rates remain low Selected household quoted rates(a) Change since (basis points) April 2019 January July August January (per cent) 2019 2018 2017 2017 Mortgages Two-year variable rate, 75% LTV 1.60 -2 6 21 11 Two-year fixed rate, 60% LTV 1.60 -5 -13 36 27 Two-year fixed rate, 75% LTV 1.67 -5 -8 24 22 Five-year fixed rate, 75% LTV 2.03 -2 -1 7 -19 Two-year fixed rate, 90% LTV 2.19 -4 -11 -14 -31 Two-year fixed rate, 95% LTV 2.96 -8 -82 -106 -66 Consumer credit £10,000 personal loan 3.79 6 3 0 10 Credit card 19.87 120 152 191 191 Deposits Instant access 0.42 15 21 28 27 Cash ISA 0.93 7 25 58 53 One-year fixed-rate bond 0.95 -12 8 9 35 One-year fixed-rate ISA 1.34 -7 0 23 45 Two-year fixed-rate bond 1.04 -20 -28 -12 19 Two-year fixed-rate ISA 1.29 -11 6 19 47 (a) The Bank’s quoted rate series are weighted monthly average rates advertised by all UK banks and building societies with products meeting the specific criteria. Not seasonally adjusted. Data for April are flash estimates and subject to change until they are published on 8 May. Since February 2019 data, the methodology used to calculate these data has changed; for more information see www.bankofengland.co.uk/statistics/articles/2019/introduction-of-new-quoted-rates-data
Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 5 Box 1 The Committee's February Report projections were Monetary policy since the February Report conditioned on a smooth adjustment to the average of a range of possible outcomes for the UKs eventual trading At its meeting ending on 21 March 2019, the MPC noted that relationship with the EU. The MPC noted that the economic the news in economic data had been mixed but that the outlook would continue to depend significantly on the nature February Report projections appeared on track. In those and timing of EU withdrawal, in particular: the new trading projections, a weaker near-term outlook was expected to lead arrangements between the EU and the United Kingdom to a small margin of slack opening up this year. Thereafter, whether the transition to them is abrupt or smooth; and how demand growth exceeded the subdued pace of supply growth households, businesses and financial markets respond. The and excess demand built over the second half of the forecast appropriate path of n monetary policy would depend on the balance of these effects on demand, supply and the exchange rate. The monetary policy response to Brexit, whatever form it takes would not be automatic and could be in either direction he brontin-bead d ote ning n al cbad tioP s nd rase iowa supported by announcements of more accommodative As in February, the MPC judged that the current stance of policies in some major economies monetary policy remained appropriate. The Committee continued to judge that, were the economy to develop broadly shifting expectations about the potential nature and timing of in line with its February Report projections, an ongoing the UK's withdrawal from the EU had continued to generate tightening of monetary policy over the forecast period, at a volatility in UK asset prices, particularly the sterling exchange gradual pace and to a limited extent, would be appropriate to rate. Brexit uncertainties had also continued to weigh on return inflation sustainably to the 2% target at a conventional orizon confidence and short-term economic activity, notably business investment. Employment growth had been strong, although survey indicators suggested that the outlook had softened Most indicators of consumer spending were consistent with ongoing modest growth. As the Committee had previously noted, short-term economic data might provide less of a signal than usual about the medium-term growth outlook CPI inflation had risen slightly to 1.9% in February and wa expected to remain close to the 2% target over coming months. The labour market had remained tight and annual pay growth, having risen through 2018, had remained around 312%. Given continuing weakness in productivity growth, growth in unit wage costs had also risen, although other indicators of domestically generated inflation had remained modest
Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 5 Box 1 Monetary policy since the February Report At its meeting ending on 21 March 2019, the MPC noted that the news in economic data had been mixed, but that the February Report projections appeared on track. In those projections, a weaker near-term outlook was expected to lead to a small margin of slack opening up this year. Thereafter, demand growth exceeded the subdued pace of supply growth and excess demand built over the second half of the forecast period. The broad-based softening in global GDP and trade growth had continued. Global financial conditions had eased, in part supported by announcements of more accommodative policies in some major economies. Shifting expectations about the potential nature and timing of the UK’s withdrawal from the EU had continued to generate volatility in UK asset prices, particularly the sterling exchange rate. Brexit uncertainties had also continued to weigh on confidence and short-term economic activity, notably business investment. Employment growth had been strong, although survey indicators suggested that the outlook had softened. Most indicators of consumer spending were consistent with ongoing modest growth. As the Committee had previously noted, short-term economic data might provide less of a signal than usual about the medium-term growth outlook. CPI inflation had risen slightly to 1.9% in February and was expected to remain close to the 2% target over coming months. The labour market had remained tight and annual pay growth, having risen through 2018, had remained around 3½%. Given continuing weakness in productivity growth, growth in unit wage costs had also risen, although other indicators of domestically generated inflation had remained modest. The Committee’s February Report projections were conditioned on a smooth adjustment to the average of a range of possible outcomes for the UK’s eventual trading relationship with the EU. The MPC noted that the economic outlook would continue to depend significantly on the nature and timing of EU withdrawal, in particular: the new trading arrangements between the EU 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 would depend on the balance of these effects on demand, supply and the exchange rate. The monetary policy response to Brexit, whatever form it takes, would not be automatic and could be in either direction. As in February, the MPC judged that the current stance of monetary policy remained appropriate. The Committee continued to judge that, were the economy to develop broadly in line with its February 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