The UK economy has been recovering rapidly from the severe effects of Covid. In the latest Monetary Policy Report, our forecasts show that the recovery looks set to continue, as people become more confident about spending.
Many of my contacts at shops, pubs, cafes, and other businesses across Dorset and Central Southern England say that vaccines and the lifting of restrictions are already boosting their customers’ confidence.
The UK economy is forecast to get to the size it was before the pandemic towards the end of this year. That’s a strong recovery when you consider that it shrank by nearly 23% (and around 21½% in the South West) in the first half of 2020. But it means nearly two years of no growth due to the pandemic, illustrating how tough a period it has been for many households and businesses.
We have been doing all we can to support the economy and speed the recovery. We cut our Bank Rate—the interest rate that many loans are linked to—to a record low of 0.10% in March 2020, and we have kept it there. And our quantitative easing (QE) programme, is helping to keep the interest rates on mortgages and business loans low. Lower interest rates also mean cheaper loans for households and businesses, leaving them with more money to spend on goods and services, on investment, and on jobs.
Although unemployment has risen—in the South West the unemployment rate was 3.7% in March-May 2021, compared with 2.8% in October-December 2019—there hasn’t been the really big rise that was a real worry last year. That’s mainly because the government’s furlough scheme has helped many people stay in their jobs. And now the recovery is starting to bring unemployment back down.
Indeed, some of my business contacts have been telling me that they have been finding it very hard to find people for certain jobs, such as lorry drivers, construction and hotel staff. Contacts have also been reporting that prices of the materials they use and other costs, such as transport, have been rising rapidly this year. So they are having to increase the prices they charge for their products.
In the UK, the prices of the things people typically buy increased by 2.5% between June last year (when prices were low because of Covid) and June this year. The Monetary Policy Report shows we expect this rate of price inflation to rise further above our 2% target and reach a peak at 4% around the turn of the year.
Across the world, the economic recovery has led to a sharp pick-up in demand for the materials used by businesses, such as oil and steel, and their prices have bounced back from the lows they fell to last year. In some areas, the pick-up has been so sharp that bottlenecks have developed—for example, a shortage of shipping containers—causing delays in getting materials and goods to where they’re wanted. We don’t think that demand will continue to rise as fast in future years, and we expect that the bottlenecks will ease.
So our forecast is for inflation to start to fall from the middle of next year and get back to our target in around two years’ time. We take the risk of persistently higher inflation very seriously, and we are closely monitoring the economy for signs of inflation remaining above target for longer. The risks to inflation are not all in one direction, however—if growth slows, that might reduce the upward pressure on prices.
All told, the Bank’s Monetary Policy Committee (MPC) judges that the risks around the inflation forecast are broadly balanced. The MPC will continue to set interest rates to support households and businesses and ensure that inflation gets back to target.
With the help of our contacts here in Dorset and the rest of the UK, I and my fellow Bank of England Agents will ensure that the MPC’s decisions, whatever they turn out to be, are based on the facts on the ground.
Andrew Holder, Agent for Central Southern England, Bank of England