An economic assessment
The Bank of England Monetary Policy Committee (or MPC) voted by a majority of 8:1 to maintain a bank rate at 0.5% yesterday. The MPC also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at 375 billion pounds.
Let’s take a look at how the UK economy has moved from its pre-crisis level and the factors influencing its growth.
Lowering interest rates enabled economic growth
Policymakers use interest rates as a tool to keep inflationary pressure and consumer spending in check. In an attempt to bring the UK economy out of the Great Recession and attain the economic growth, the Bank of England or BoE reduced its benchmark interest rate at regular intervals.
By lowering interest rates during a crisis, the BoE has provided easy access to financing. This has improved consumer sentiment and spending habits, stimulating economic growth.
Household expenditure drives economic growth in Q3 2015
The BoE lowered interest rates from a peak of 5.8% pre-crisis to 0.5% in December 2015. With this move, the UK economy has grown from -5.9% during the Great Recession to a GDP growth rate of 2.3% in Q3 2015. GDP growth in the third quarter is mainly driven by household expenditure and government spending.
A rise in consumption is good for UK-focused ETFs like the iShares MSCI United Kingdom (EWU) and the Vanguard FTSE Developed Markets ETF (VEA). The price performance of companies such as British American Tobacco (BTI), Diageo (DEO), and Intercontinental Hotels Group (IHG) reflects these changes in consumer spending.
The UK GDP has risen moderately in 2015. Due to global volatility, the economic growth in the third quarter was weak. Imports outpaced exports in the third quarter. As a result, external trade contributed negatively to GDP growth.
Still, exports are keeping growth rates modest in the United Kingdom. Let’s take a look at how the interest rate change has influenced employment levels in the next part of this series.