UK investment levels expected to stay low says Bank of England

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Jon Cunliffe (second from right) is deputy governor of the Bank of England (Source: Getty)

The Bank of England says it expects investment levels to stay weak in the UK, as it finds four in five publicly owned firms saying pressure to create short-term returns has dented investment levels over the past five years.

Sir Jon Cunliffe, a deputy governor and member of the rate-setting Monetary Policy Committee, said in a speech in Birmingham the Bank expected business investment to “remain very weak before picking up”.

The Bank’s weak outlook on investment has been influenced by its findings in a new survey that more than a third of UK businesses thought they had underinvested during the past five years. A fifth of all firms have experienced constraints on access to credit which have reduced investment.

Read more: Bank of England in dramatic upgrade of UK growth forecasts

External pressure was also found to have dragged on investment levels, with only a quarter of firms saying they prioritised investment when allocating internal funds.

Investment has lagged since the financial crisis. If investment had continued at pre-crisis trend the private sector’s capital stock would be around £240bn larger, Cunliffe said.

Cunliffe also reiterated the Bank’s view that there are “both upside and downside risks” to its forecast of two per cent growth in the UK economy this year as the government begins the process of leaving the EU, while growth in investment and the wider economy would both hinge on the outcome of negotiations.

“Ultimately, the outlook for business investment, like the outlook for the economy more generally over the forecast period, depends largely on how households and businesses react to Brexit and on the process that accompanies it,” he added.

Read more: Is it time for economists to admit they were wrong about Brexit?

The survey found business reaction to financial crisis still lingers. Businesses reported the “hurdle rate”, the necessary return to make an investment worthwhile, had stayed unchanged since the financial crisis, suggesting the Bank’s policy of ultra-low interest rates may not have boosted business investment.

Cunliffe said: “One might have expected the very low risk free rate [which is strongly influenced by the BoE’s Bank Rate] to have brought down the rate of return demanded by firms on investment.”