United Kingdom: Growth Remains Around Sustainable Rate, but Low Spare Capacity Suggests Pressure for Higher Interest Rates May Be Mounting

Summary

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The economy continues to grow at around its sustainable rate of 2.5-2.75% but there are signs that the pace of growth may pick up. Surveys of business sentiment show rising optimism whilst retail sales may be starting to strengthen again. Stronger growth in the EU may also be helping to increase exports and there are some signs that the balance of growth is tilting slightly in favour of net exports. Meanwhile, inflation remains close to the BOE target rate and there is little spare capacity in the economy. The combination of potentially stronger growth and falling spare capacity prompted one member of the bank's MPC to vote for an increase in interest rates at its meeting in May, but the majority voted to keep rates unchanged.

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United Kingdom: Growth Remains Around Sustainable Rate, but Low Spare Capacity Suggests Pressure for Higher Interest Rates May Be Mounting

Opinions about outlook for growth and inflation vary widely

Opinions about the near term outlook for growth and inflation vary widely. This was indicated most forcefully in the minutes of the Bank of England's monetary policy committee meeting in May. The voting records show that one member voted to increase rates, six argued for no change and one called for a cut. This 1-6-1 split was most unusual. Furthermore, the committee member who vot...

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