Andrew Bailey: Growth - what does it take in today's world?

Lecture by Mr Andrew Bailey, Governor of the Bank of England, at the Chancellor's Distinguished Lecture Series, The University of Leicester, Leicester, 25 March 2025.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Thank you for inviting me to speak today. It's always a pleasure to be back in my home town, and particularly here at Leicester University, not least because I went to school next door.

I am going to speak today about a topical subject – economic growth. The question I set myself is, what does it take to create a sustained increase in the growth rate of the economy in today's world? I'm going to range quite wide in answering the question, drawing in the current situation here in the UK and the world, and some economic history too.

Economic growth is, quite simply, the rate of expansion of the size of the economy. Let me start by explaining how it matters to the Monetary Policy Committee when we decide on the appropriate level of interest rates to achieve our objective of price stability, the 2% inflation target. There are two parts to why growth matters for monetary policy – the outcome and the inputs. On the first, quite simply, low and stable inflation is the best contribution monetary policy can make to growth in the economy. The same goes for financial stability, our other core responsibility as the central bank, which is also a key condition for growth.

On the inputs side, growth matters because monetary policy decisions require us to assess the inflationary consequences of the pressure on economic resources in this country. That pressure reflects the balance between demand and supply in goods and services and labour markets. To observe that level of pressure, we can't just look at actual national income or output and employment. If that's all we did, we would be left saying "so what?" We have to compare the actual position with the productive potential of the economy (the supply capacity of the economy) and in doing so assess resource utilisation and thus the degree of pressure.