The Bank of England has announced a big package of measures designed to ward off an economic slump in the aftermath of the Brexit vote. It includes a quarter-point interest rate cut, more purchases of government and corporate bonds for cash and a new funding scheme for banks.
Here are six charts that show why the Bank felt it had to act.
1. Growth
The Bank said after the Brexit vote growth was projected to “slow markedly” in coming quarters. But the central forecast in its latest inflation report (pdf) does not assume that the economy will fall into recession, as expected by some economists in the City. (The Bank noted that uncertainty around this forecast was greater than usual.)
The central bank said:
There are already signs of a weaker outlook: some uncertainty indicators have risen further; property markets appear to be weakening; and survey indicators of activity have fallen. The sterling exchange rate has also fallen sharply. That will, by itself, provide support to exporters, but it will also raise import prices, weighing on households’ real incomes and pushing up inflation.
2. Inflation
Inflation is likely to return to the Bank’s 2% target in late 2017 and then rise somewhat above it temporarily, according to the latest projections. While domestic inflationary pressures are expected to remain weak given the growth outlook, these are more than offset by external factors. The sharp fall in sterling since last November, when fears over the outcome of the EU referendum began to drag it lower, is set to push up import prices by 10% by next summer.
3. Sterling
Pointing to the pound’s sharp fall since the Brexit vote, the Bank said sterling was now 15% below its November peak, and around 10% below the path assumed in May.
4. Wages
Wages have been growing very slowly, reflecting subdued productivity growth. The Bank said wage growth had been “weak since the financial crisis” and remained below its pre-crisis average, despite picking up in recent years.
It reckons that the “national living wage”, which came into effect in April, will have only a limited effect on overall wage growth, with reports from the Bank’s agents that companies are reducing other aspects of pay such as overtime payments or by investing to boost productivity. The Bank concluded:
Overall, the outlook for four-quarter wage growth over the rest of the year is a little weaker than in May, and it is projected to remain subdued in 2017. While productivity growth is likely to slow in the second half of the year (Section 3), that is likely to feed through to wage growth more gradually.
5. Unemployment
Following the Brexit vote, unemployment is expected to be higher than the Bank assumed in May. The unemployment rate is expected to have risen modestly in July (from 4.9% in the three months to May) and to continue rising to 5.4% next year and 5.6% in 2018.
At the press conference, the Bank governor said unemployment was likely to rise by 250,000 so it is right to take action now. Mark Carney brushed aside criticism that the Bank was treating savers unfairly: “Should we have more people lose their jobs, to target a different part of the economy?”
The Bank hopes its package of stimulus measures will help bring the jobless rate back down to 5.25% in three years’ time. (It also noted that the rate was about 8% three years ago.)
6. Interest rates
Given this worsened outlook, the Bank of England has cut interest rates for the first time since March 2009, taking borrowing costs to 0.25% – the lowest since the Bank was founded in 1694.
