This goes to a more general point: a variety of aspects of the UK’s monetary policy framework – including our open letters, our new MPR and greater clarity over forecast assumptions and sensitivities – are designed 20  All speeches are available online at www.bankofengland.co.uk/news/speeches  20  to help market participants, businesses and households understand the MPC’s reaction function and thereby anticipate how monetary policy will evolve with the economy. This makes policy both easier to predict and more effective. Second, monetary policy is also more effective when it is combined with vigilant macro- and micro-prudential policies. A frequently expressed concern is that low policy rates are generating risks to financial stability – often linked to undesirable “search for yield” behaviour. 24 While vigilance is required, it is essential to leverage the synergies of monetary and macro-prudential policies. In many situations monetary policy actions are complementary to financial stability. After all, stimulating more risk taking is one of the goals of low policy rates, whereas recessions emerge when demand shifts away from risky assets and towards safe assets. Easing monetary policy changes people’s incentives in order to mitigate that shift. 25 Low interest rates can also benefit financial stability by making debts more serviceable. More fundamentally, risks to financial stability should primarily be addressed by (macro and micro) prudential policy, with monetary policy as the last – not the first – line of defence.
Unusually during an expansion, business investment has contracted in four out of the past seven quarters and is currently estimated to be just 1½% higher than at the time of the referendum, with cumulative growth more than 20 percentage points less than forecast in the MPC’s May 2016 projections. Household spending growth has remained more resilient, supported by strength in employment and pay, but over the past year it too has slowed as uncertainty about the overall economic outlook has become more entrenched. 18  All speeches are available online at www.bankofengland.co.uk/news/speeches  18  Chart 12: More recent deterioration in global and domestic growth a) Global GDP growth Percentage changes on a year earlier 4  EU referendum  3.5 PPP-weighted world GDP 3 2.5 2  UK- weighted world GDP  1.5 2014  2015  2016  2017  2018  2019  Sources: Datastream from Refinitiv, IMF October 2019 WEO and Bank calculations. b) UK GDP growth Quarterly growth (%) 0.5 GDP growth  Potential GDP growth  0.4 0.3 0.2 0.1 0.0  2017-18 average  2019 average  In the MPC’s most recent projections, we expected these negative trends to reverse. Overall, UK GDP growth was projected to pick up from current below-potential rates, supported by the reduction of Brexitrelated uncertainties, an easing of fiscal policy and a modest recovery in global growth. This rebound is not, of course, assured. The economy has been sluggish, slack has been growing, and inflation is below target.