September 21, 2023
The Bank of England’s Monetary Policy Committee (MPC) at its meeting ended September 20, 2023 voted to maintain the Bank Rate at 5.25%, as opposed to increasing the bank rate to 5.5%. The MPC also decided to reduce the stock of UK government bond purchases by 100 billion pounds to a total of 658 billion pounds over the next twelve months.
Noted in the August Monetary Policy Report projections, conditioned on the market-implied path for Bank Rate which averaged just under 5.5% over the three-year forecast period, CPI inflation expectation for Q2 2025 was to return to its 2% target. It was then forecasted to fall below target in the medium term due to declining external cost pressures as well as the easing in economic activity that would lower domestic inflationary pressures.
The Committee believes that the risks related to the expected inflation rate tend to be higher than anticipated, although not as much as in May. This is because there is a chance that the lingering impact of external cost increases on inflation, particularly in terms of wages and domestic prices, might take longer to reverse than it took for them to initially appear. The average projection for CPI inflation, factoring in these risks, is 2.0% for a two-year horizon and 1.9% for a three-year horizon.
The MPC highlighted, “UK GDP is estimated to have declined by 0.5% in July and the S&P Global/CIPS composite output PMI fell in August, although other business survey indicators remain consistent with positive GDP growth. While some of this news could prove erratic, Bank staff now expect GDP to rise only slightly in 2023 Q3. Underlying growth in the second half of 2023 is also likely to be weaker than expected. There have been some further signs of a loosening in the labour market, although it remains tight by historical standards. The vacancies-to-unemployment ratio has continued to decline, reflecting both a steady fall in the number of vacancies and rising unemployment. The Labour Force Survey unemployment rate rose to 4.3% in the three months to July, higher than expected in the August Report.”
The CPI for the twelve-months fell by 0.4pp lower than anticipated by the MPC, to 6.7% in August from 7.9% June. Core goods CPI inflation has fallen to 5.2% in August from 6.4% in June, while Services CPI inflation rose from 7.2% in June to 7.4% in July but declined to 6.8% in August, both also moving to levels beneath expectation. Furthermore, CPI inflation in the near term is expected to fall significantly further, reflecting lower annual energy prices notwithstanding recent increases in oil prices, and further declines in food and core goods price inflation. Services CPI inflation is projected to remain high in the near term, with a degree of monthly volatility.
The UK monetary policy framework recognizes that there will be occasions when inflation will depart from the target resulting from shocks and disturbances. The Committee indicated that they would continue to closely monitor indications of persistent inflationary pressures and resilience in the economy, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. Nonetheless, The MPC will continue to tighten the monetary policy considering persistent pressures to the economic outlook, thus maintaining restrictive bank rates to ensure that inflation returns to the 2% target sustainably in the medium term.
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