Visual summary - Inflation Report May 2019

The interest rate decision

Our role is to set interest rates to influence the amount of spending in the economy in order to ensure inflation (the pace of price rises) returns to our 2% target sustainably.

Low and stable inflation supports growth 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.

As our economy started to grow more quickly, and with inflation above the 2% target, it needed a little less support. So we raised the official interest rate from 0.25% to 0.5% in November 2017 and then from 0.5% to 0.75% in August 2018.

Since then, uncertainties over Brexit have increased, UK and global economic growth has been subdued, and inflation has fallen back close to our 2% target. We have kept interest rates unchanged this month.

If the economy performs as we expect, we think upward pressure on prices will build over the next few years and we will need to raise interest rates a bit more to keep inflation at target. 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 before the financial crisis.

Our view is based on the assumption that there will be a smooth Brexit where households and businesses have time to adjust to the new relationship between the UK and the EU.

Whatever form Brexit takes, we will set interest rates to keep inflation low and support jobs and growth.

• View chart See how low Bank Rate is compared with the past
  

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Inflation is close to our 2% target

For most of the past two years, the prices of the things you buy have been going up by more than our 2% target on average.

That’s been mainly due to the big fall in the pound following the Brexit vote. The lower pound has meant that things businesses get from abroad cost more. Businesses have been passing those rising costs on to their customers. So that has meant higher prices in the shops.

Most of the increase in inflation due to the fall in the pound has now happened.

Because of this, inflation is now back close to our 2% target.

We expect inflation to be below the target later this year partly because of lower household gas prices. But this effect is unlikely to persist.

• View chart See how inflation is close to our target
  

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Whatever form Brexit takes, we will keep inflation low and support the economy

Our view that a gradual and limited rise in interest rates is likely to be needed is based on an assumption that there will be a smooth Brexit.

A smooth Brexit means the UK and EU agree a deal and there is a period of time where businesses can adjust to the new relationship between the UK and the EU.

The path of the economy will depend on the outcome of Brexit.

Brexit could affect spending. People might spend more if they become more confident about their future income, or spend less if they think Brexit will make them worse off.

It could also affect companies’ ability to supply goods and services. For example, there may be delays at the border or disruption to supply chains if businesses are not given enough time to adjust to the new relationship between the UK and the EU.

Brexit could also affect the value of the pound depending on how people in financial markets respond to the type of Brexit.

How we set interest rates in response will depend on the balance of its effects on demand, supply, and the value of the pound.

The nature of Brexit will affect the UK economy. But whatever happens, we will set interest rates to keep inflation low and support jobs and growth.