Visual summary - Inflation Report May 2018

We cut interest rates to exceptionally low levels during the financial crisis to support spending and to reduce the number of people out of work.

Over the past few years our economy has needed interest rates to stay very low as we recovered from the global financial crisis.

But things have been changing. The world economy is now growing relatively robustly. In the UK, the share of people without a job is at its lowest level for over 40 years, and businesses are finding it hard to recruit people. And although it has fallen in recent months, inflation is still above our 2% target.

Growth dipped earlier this year. We think at least part of that was due to the effects of the snow and so will be short-lived. The snow made it harder for people to get to work and reduced spending on things like going out for a meal. And it would have made it harder to do some work like building houses. If it was just snow, growth should pick up again. But we won’t know for sure until we see more evidence.

Last November, we raised the official interest rate we set, known as Bank Rate, from 0.25% to 0.5%. If the economy continues to perform as expected, it will probably be growing about as fast as it can without overheating. In that case we think we would need to raise interest rates further, reducing the amount of support we are providing to the economy.

Higher interest rates might seem a bad thing, especially if you have a lot of debt. But they are a sign of an economy growing about as fast as it can and that is able to support higher wages. Small increases in interest rates now can avoid the need for bigger ones later.

How are we getting inflation back to target?

To make sure inflation falls back all the way to our 2% target and stays there, we need to set interest rates so that the amount of spending in the economy isn't too low or too high. If we set interest rates too low, then growth in the economy will be too fast, and inflation will stay above our target. But if we set interest rates too high or raise them too rapidly then growth will be too slow, and inflation will fall below our target.

During the financial crisis, people reined in their spending and many lost their jobs. We had to cut interest rates to exceptionally low levels to support spending and jobs. Over the past few years, our economy has needed interest rates to stay very low as we recovered from the global financial crisis.

But things have been changing.

The squeeze on pay is easing

Over 2017, prices were rising faster than wages meaning people were not able to afford as much. That is now starting to change.

Pay rises for most have been pretty low. But recently wages on average have started to rise faster than prices again. That is easing the squeeze on people's living standards.

That squeeze should ease further this year, supporting growth in the economy. The share of people out of work is now at its lowest level for more than 40 years. And there are a lot of job vacancies. This means that companies need to compete hard with each other to recruit and retain workers. One way they do that is by offering higher pay. The pressure in the jobs market means we're expecting to see bigger, more widespread pay rises in coming years.

• Expand chart See how pay is starting to rise more than prices
  

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Inflation has started to fall back towards our 2% target, having been pushed up by the sharp fall in the pound triggered by the EU referendum.  To ensure a sustainable return of inflation to the target, we need to keep the economy growing at around its speed limit.

After raising interest rates last November from 0.25% to 0.5%, this month we have left them unchanged. If the economy performs broadly as we expect, then we will need to reduce the amount of support we are providing to make sure inflation returns sustainably to the target. We think that will probably require further modest rises in interest rates over the next few years.  We expect any rises in interest rates to happen at a gradual pace and to a limited extent.  Interest rates are likely to remain substantially lower than a decade ago.