The current rate of growth is as good as it gets for UK consumers, Mark Carney has said.
Mark Carney, the governor of the Bank of England was speaking after the central bank decided to leave interest rates unchanged at 0.75 per cent.
Mr Carney said the UK economy was “probably growing about as fast as it has capacity to without pushing up prices quickly”.
In fact the Bank of England cut its forecast for UK growth by 0.1 per cent for this year and next.
The definition of how fast an economy can grow without a sharp rise in inflation is called the trend rate of growth.
An economy can grow much faster than the trend rate in the short term but this leads to higher inflation, which typically provokes the central bank to raise interest rates quickly, which tends to reduce economic growth.
An economy growing at markedly above or below the trend rate of growth does so because of government or central bank policy, before reverting to the trend over time.
The Bank of England’s assessment was made before the Budget of 29 October, in which Chancellor of the Exchequer Philip Hammond unveiled tax cuts and increased public spending, initiatives which both Mr Hammond and his Labour Party counterpart John McDonnell said would stimulate growth in the short term.
Andy Haldane, the Bank of England’s chief economist has said the UK leaving the European Union was likely to reduce the long-term trend rate of growth to 1.5 per cent, down from the previous level of 2 per cent.
Mr Haldane’s view was that the trend rate of growth in the economy was determined largely by the size and productivity of the working age population.
He said migration into the UK was likely to fall after Brexit, reducing the size of the working age population and so reducing the trend rate of growth. He said migrant workers were, in aggregate, more productive than native workers so a reduction in migration would also reduce the trend rate of growth.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the uncertainty around the outcome of the Brexit negotiations meant the Bank of England had little choice but to leave interest rates unchanged.
He said the central bank painted a “dreary” picture of the long-term growth potential for the UK economy which indicated interest rates would remain low relative to history for the long term.
In the quarterly inflation report, released alongside the interest rate decision, the Bank of England said it expected to put interest rates up in the next 12 months if the economy continued on its current trajectory, but also said it may have to put interest rates up in the event of a disorderly Brexit, even if economic growth has slowed dramatically, to prevent sterling collapsing in value and delivering an inflation shock to the economy.
David Cheetham, chief market analyst at XTB, said the market reaction to the news was muted because various aspects of the Bank of England’s communication were “mixed”.
Paul Stocks, financial services director at Dobson and Hodge, said Brexit was one of many issues facing investors now, but he was trying to invest on behalf of clients for a longer term time frame.
He said he tended to have more global funds in his clients portfolios than UK ones due to a wave of issues.
Bill Casey, a UK equity fund manager at Schroders, said he was investing more in UK companies that have defensive characteristics.
Source: FT Adviser