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The UK Economic Outlook

The UK Economic Outlook. Neil Ashbridge, Deputy Agent, Bank of England, North West Agency. The UK Monetary Framework. What is inflation? What causes inflation? Why is inflation undesirable?. Inflation. Hampers longer-term planning Increases risk and borrowing costs Misdirects resources

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The UK Economic Outlook

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  1. The UK Economic Outlook Neil Ashbridge, Deputy Agent, Bank of England, North West Agency

  2. The UK Monetary Framework

  3. What is inflation? What causes inflation? Why is inflation undesirable? Inflation

  4. Hampers longer-term planning Increases risk and borrowing costs Misdirects resources Less equitable Economic instability Inflation

  5. Annual Inflation in the UK

  6. Monetary Policy Committee (MPC) The remit is ‘price stability’ The target is (CPI) inflation of 2.0% Target is symmetrical Single tool - short term interest rates UK Monetary Policy Framework

  7. The UK Economic Outlook

  8. Money and assets prices

  9. Bank Rate and forward market interest rates Per cent 6.00 5.75 5.50 02-July-08 5.25 5.00 4-Jun-08 4.75 4.50 7-May-08 4.25 4.00 May Jun Jul Aug Sep Oct Nov Dec Jan MPC Dates

  10. Sterling exchange rates

  11. FTSE all share cumulative changes since January 2007

  12. Halifax and Nationwide house price inflation

  13. Mortgage approvals for house purchases May 2008 42,000

  14. Expected change Reported change Overall corporate credit availability Net percentage balance 80 60 More credit supplied 40 20 0 -20 Less credit supplied -40 -60 -80 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008

  15. Expected change Reported change Demand for credit by PNFCs Net percentage balances 80 Higher demand Medium-sized PNFCs Large-sized PNFCs 60 40 20 0 -20 -40 -60 Lower demand -80 Q2 Q3 Q4 Q1 Q2 Q3 Q2 Q3 Q4 Q1 Q2 Q3 08 07 07 08

  16. Demand and output

  17. Q1 2.3 Real GDP at market prices Percentage changes 4.5 Latest quarter on a year earlier 4.0 3.5 3.0 2.5 2.0 1.5 Latest quarter on previous quarter 1.0 0.3 0.5 0.0 2002 2003 2004 2005 2006 2007 2008

  18. Retail sales values vs surveys Percentage change, latest 3 months on previous year 8 Survey average 6 4 2 ONS 0 -2 2002 2003 2004 2005 2006 2007 2008

  19. Q1 4.5 -1.8 Business investment Percentage changes 15 Latest quarter on previous quarter 10 5 0 -5 Latest quarter on a year earlier -10 2002 2003 2004 2005 2006 2007 2008

  20. US, Euro area and Japan GDP US Japan Euro area

  21. Supply

  22. Per cent 60.5 Overlapping 3 month data 60.4 60.3 60.2 60.1 60.0 59.9 59.8 Single month data 59.7 59.6 59.5 2003 2004 2005 2006 2007 2008 Employment rate 16+ population

  23. Changes in surveys of employment intentions since September 2007

  24. Costs and prices

  25. CPI goods and services price inflation Services CPI Goods

  26. 450 400 350 300 250 200 150 100 50 0 2003 2004 2005 2006 2007 2008 Coal, gas and oil prices Jan 2003=100 Index Coal Oil Gas

  27. 12 10 8 6 4 2 0 -2 -4 -6 2002 2003 2004 2005 2006 2007 2008 Import price inflation annual rate Per cent 10.6 Goods import deflator 6.3 Goods import deflator excluding energy components

  28. Manufacturers input and output prices Input prices Output prices

  29. Per cent 7 6 AEI 5 4 3 2 AWE 1 0 2001 2002 2003 2004 2005 2006 2007 2008 Whole economy earnings growth 4.5 3.8

  30. Prospects for inflation

  31. One year ahead inflation expectations June 5.6% 4.6% May 4.3%

  32. GDP projection based on market interest rate expectations

  33. CPI inflation projection based on market interest rate expectations

  34. MPC’s projection continues to be shaped by two opposing factors Tighter credit expected to weigh on demand and therefore inflation but the magnitude and duration of the tightening and its impact on households and companies is highly uncertain. A prolonged period of above-target inflation, as envisaged in the central projection, could lead to higher inflation expectations and push up on medium-term inflationary pressures. In the near-term the risks to growth are balanced, but the possibility of a longer-lived slowdown means that the risks are to the downside further out. In contrast, the risks to inflation are to the upside. Risks around central projection

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