November 2, 2023
The Bank of England’s Monetary Policy Committee (MPC) at its meeting ended November 1, 2023, voted to maintain the Bank Rate at 5.25%, as opposed to increasing the bank rate to 5.5%. The MPC believes that the bank rate will help sustain growth and employment, and ultimately meet the 2% inflation target.
The MPC updated projections for activity and inflation are in accordance with the November monetary policy report. These are conditioned on a market-implied path for Bank Rate that remains around 5¼% until 2024 Q3 and then declines gradually to 4¼% by the end of 2026, a lower profile than underpinned the August projections.
Since the last meeting of the MPC, long-term government bond yields have risen in advanced economies. The United States has experienced stronger GDP growth than initially anticipated. Advanced economies continue to grapple with elevated underlying inflationary pressures. In the wake of recent developments in the Middle East, the oil futures curve has seen some upward movement, while gas futures prices have remained relatively stable.
The MPC highlighted, “UK GDP is expected to have been flat in 2023 Q3, weaker than projected in the August Report. Some business surveys are pointing to a slight contraction of output in Q4 but others are less pessimistic. GDP is expected to grow by 0.1% in Q4, also weaker than projected previously. The MPC continues to consider a wide range of data to inform its view on developments in labour market activity, rather than focusing on a single indicator. The increasing uncertainties surrounding the Labour Force Survey underline the importance of this approach. Against a backdrop of subdued economic activity, employment growth is likely to have softened over the second half of 2023, and to a greater extent than projected in the August Report. Falling vacancies and surveys indicating an easing of recruitment difficulties also point to a loosening in the labour market. Contacts of the Bank’s Agents have similarly reported an easing in hiring constraints, although persistent skills shortages remain in some sectors.”
In September and the third quarter of 2023, twelve-month CPI inflation dropped to 6.7%, which was lower than what was anticipated in the August Report. This decrease can be attributed mainly to lower core goods price inflation. Services inflation, standing at around 7%, has been slightly weaker than expected in August. While CPI inflation remains significantly above the 2% target, it is projected to decrease substantially to 4¾% in the fourth quarter of 2023, 4½% in the first quarter of 2024, and 3¾% in the second quarter of 2024. This decline is expected to be driven by reduced inflation in energy, core goods, and food prices, and to some extent, a decrease in services inflation after January.
According to the MPC’s latest projection, based on the market-implied path for the Bank Rate, CPI inflation is expected to return to the 2% target by the end of 2025. However, it is anticipated to dip below the target thereafter due to increasing economic slack, which will reduce domestic inflationary pressures. The Committee maintains its view that the risks to this central inflation projection lean towards the upside, as second-round effects on domestic prices and wages are expected to persist longer than they took to emerge. Furthermore, there are additional inflationary risks from energy prices, particularly considering recent developments in the Middle East. Considering these risks, the mean projection for CPI inflation stands at 2.2% and 1.9% at the two and three-year horizons, respectively.
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, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. Also, The MPC acknowledges that its monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term.
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