AMA SERVSIG CONFERENCE: Liverpool UK Monetary Policy: the economic outlook for the services sector

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AMA SERVSIG CONFERENCE LiverpoolUK Monetary
Policy the economic outlook for the services
sector

• Neil Ashbridge, Bank of England
• June 7, 2008

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The UK Monetary Framework
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Inflation

• What is inflation?
• What causes inflation?

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The Economic Cycle
GDP
Inflation pressures
GDP
Growth trend
Unemployment worries
Time
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Inflation

• What is inflation?
• What causes inflation?
• Why is inflation undesirable?

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Inflation

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

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Annual Inflation in the UK
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From interest rates to inflation the
transmission mechanism of monetary policy
Market rate
Domestic demand
Domestic Inflationary pressure
Total demand
Asset prices
Inflation
Net external demand
Official rate
Expectations/ confidence
Import prices
Exchange rate
0 24 Months
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Monetary Policy

• 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

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The Economic Outlook
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Money and asset prices
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Bank Rate and forward market interest rates
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UK three-month interbank rates relative to future
expected policy rates
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Sterling exchange rates
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Cumulative changes in equity prices since 4
January 2007
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Property prices
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Demand
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Indicators of household spending
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Consumption of services
Percentage change on a year earlier
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CBI consumer services
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3
2
1
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ONS consumption of services
-1
Agents' score for consumer services
-2
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
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Investment intentions
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US, Euro area and Japan GDP
US
Japan
Euro area
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UK Financial Services Exports
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Financial Services Exports other economies
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Output and supply
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Contributions to GDP growth
Percentage point contributions to
annual growth in GDP(O)
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Construction
Agriculture
Production
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Services
GDP(O) (per cent)
3
2
1

0
-
1
2001
02
03
04
05
06
07
08
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Contributions to four-quarter service sector
output growth
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Indicators of service sector output growth
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Measures of capacity utilisation
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Changes in surveys of employment intentions since
September 2007
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Costs and prices
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CPI goods and services prices inflation
Services
CPI
Goods
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Sterling oil and gas prices
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Import prices
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Manufacturing input and output prices
Input prices
Output prices
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Changes in measures of inflation expectations
since August 2007
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Public and private sector regular pay
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Prospects for inflation
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GDP projection based on market interest rate
expectations
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CPI inflation projection based on market interest
rate expectations
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Risks around central projection

• MPCs 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.

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