Bailey speech: We face a challenge to raise the potential growth rate of the economy

Source Fxstreet

Bank of England (BoE) Governor Andrew Bailey said late Monday that the UK central bank faces a challenge to raise the potential growth rate of the economy. 

Key quotes

There are strong headwinds against boosting potential growth.

We must facilitate AI as the most likely general-purpose tech that can move the needed on growth in the economy.

We must also invest in new skills in the labour force.

We have been forcefully reminded that trade policy has to include a national security dimension.

Businesses are currently keeping all options open on how to respond to national insurance rises. 

Market reaction

At the time of press, the EUR/USD pair was up 0.27% on the day at 1.0801.

BoE FAQs

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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