The Bank provides reasons to be cheerful over state of economy

The Bank of England’s latest assessment of the state of the UK economy should give businesses and households here in Yorkshire and the Humber good reason for optimism.

Our August Inflation Report, which we presented to our business contacts at an event in Leeds this week, describes an economy that continues to see strong growth, despite some persistent headwinds.

Household spending has been supported by the boost to real incomes from lower food and energy prices, wage growth has begun to pick up, and we are even seeing signs of a long-awaited improvement in productivity.

This picture largely reflects what my colleagues and I in the Bank’s network of regional agents see as we visit firms around the country.

Business confidence, reflected in positive intentions for both investment and recruitment, was reported in the latest Agents’ Summary of Business Conditions, which was published yesterday.

It reports further steady growth across most of the economy, with sectors such as consumer services doing especially well.

We see plentiful evidence of this in Yorkshire and the Humber, with many of our contacts in the leisure sector in particular seeing really encouraging trade so far this year.

Of course, we continue to hear concerns from contacts too – for example from exporters struggling due to the strong pound, and of continued pressures in the oil and gas supply chain.

The agents also hear reports of recruitment difficulties increasing, with skills shortages becoming more widespread.

Despite recent small rises in unemployment, such issues continue to feature prominently at the roundtable discussions I attend with businesses of all sizes here in Yorkshire and the Humber.

The Inflation Report was accompanied by the news that the Monetary Policy Committee, who set interest rates, had voted by 8-1 to maintain bank rate at 0.5 per cent.

They took this decision against a backdrop of extremely low inflation – the Consumer Prices Index edged down to zero in June.

The committee expects inflation to continue at this low level for the next few months before picking up at the end of the year and getting back to the bank’s 2 per cent target within two years.

Continued low inflation largely reflects the effects of the big falls in energy, food and other imported goods prices over the past 12 months, which together account for about three quarters of the deviation of inflation from the bank’s 2 per cent target.

But it is also due to past weaknesses in domestic costs, notably wages, which recent data suggests are now beginning to pick-up.

Higher pay will eventually feed through to inflation and, as the effects of the fall in oil and other commodity prices wanes, inflation should start to rise.

As changes in interest rates take a while to feed through the economy, the MPC makes decisions based on the impact they would have on inflation in 18 months to two years’ time.

Given this strong outlook, the bank’s Governor Mark Carney said last week that the likely timing of a rate rise was drawing closer. The exact timing of the first increase, however, will depend on the data that emerges over the coming months. The MPC will monitor this and hear regularly from the agents about developments in our region.

What matters most for many households and businesses is the path for interest rate rises. Here the MPC repeated its guidance that, given the likely persistence of headwinds facing the economy, rate increases, when they come, are expected to be gradual, and be limited to a level below past averages.

By acting in this manner, the MPC can play its part in securing the continued expansion of the Yorkshire and Humber economy and help businesses in our region to build on their hard-won gains of recent years.

Juliette Healey is the Bank of England’s Agent for Yorkshire and the Humber.

You can read the Inflation Report and Agents’ Summary of Business Conditions in full at www.bankofengland.co.uk

The Bank of England has made some important changes to the way it communicates its decisions about monetary policy and its assessment of the economy. Last week’s quarterly Inflation Report was published at the same time as the decision of the MPC meeting and the minutes of that meeting.

The move is part of an effort to make our decision-making as transparent as possible.

The Bank’s network of regional agencies, such as the Agency for Yorkshire and the Humber, plays an important part in that process. We hold briefings for businesses at various locations across the regions shortly after the Inflation Report is published, to explain its key messages and to answer questions.

We also meet one-to-one with over 400 contacts in the region during the year and hold dozens of meetings with larger groups, and gather information to directly inform policymakers.