Bank of England Insight: Foundations for prosperity in uncertain times

The Bank of England’s Agents talk to hundreds of businesses around the country each month to form a view of business conditions for the Bank of England’s Monetary Policy Committee (MPC), which sets Bank Rate.  We also talk to professional advisers, consultants, and associations such as the MCA, who help us by giving an overview of conditions across a much wider range of businesses than we can meet ourselves. 

One word that crops up often in discussions with businesses in London over recent months is ‘uncertainty’.  Evidence from a range of measures that the Bank of England looks at suggests uncertainty has been higher than normal since June’s referendum on the UK’s membership of the European Union.

Yet, despite that, the economy has continued to perform more strongly than many – including the Bank – had expected.

For some contacts I talk to, 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 – and pay is growing modestly, but faster than inflation.

For companies and households looking to borrow, credit is readily available and competitively priced.

Recent growth has been supported by a package of measures introduced by the MPC in August, including a small cut in interest rates which has reduced mortgage repayments for many households.

The low cost and good availability of mortgages has also supported activity in the housing market, which has proved more resilient than expected, especially outside London.

Businesses have also seen the cost of borrowing fall.  But they will typically only invest if they are confident about the outlook.  And, as I mentioned earlier, some tell us they remain quite cautious.

A survey of our contacts published with our latest Agents’ Summary of Business Conditions suggests investment spending will likely be broadly stable or slightly lower in the year ahead, after quite a significant increase over the past 12 months.

And the “uncertainty” word figures prominently in our report.

Uncertainty about the demand outlook was the biggest drag on investment plans, particularly in manufacturing and construction. And uncertainty about future trading arrangements was the other main negative factor, especially for manufacturers. 

The drop in the value of the pound over recent months at least partly reflects concerns in financial markets about the same issue.

It was a key theme of the MPC’s latest Inflation Report, which was published at the beginning of November.

The MPC’s growth forecast for next year is stronger than that set out back in August, reflecting the economy’s robust recent performance.

But the outlook for 2017 and 2018 is weaker, partly because the lower value of the pound will make imports more expensive.  This is expected to push up prices, which will weigh on consumer spending growth.

Faced with a period of inflation above its 2% 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%. But it has said that policy could respond in either direction, depending on how inflation and growth prospects develop.

As this story unfolds, the reports the MPC hear from our Agency contacts such as the MCA are vital.  We look to professional services firms for intelligence on how their clients’ businesses are shaping, as well as their own. 

In a time when some companies face a need to adapt their business strategies, management consultants are in prime position to advise on the changes required.  So Monetary Policy Committee members find intelligence from consultants extremely valuable as they decide how Bank policy should evolve.

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.

 Peter Andrews is the Bank of England’s Agent for Greater London