December 14, 2023
The Bank of England’s Monetary Policy Committee (MPC) at its meeting ended December 13, 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.
In the November Monetary Policy Report, the MPC projected flat GDP in the first half, reflecting weak potential supply and anticipated economic slack. Based on a market-implied path for Bank Rate, CPI inflation was expected to return to the 2% target by the end of 2025, falling below thereafter. Risks to the inflation projection were deemed skewed to the upside, with mean projections at 2.2% and 1.9% at the two and three-year horizons.
Since the MPC’s last meeting, there has been a significant decrease in advanced-economy government bond yields, particularly at shorter horizons, accompanied by a rise in risky asset prices. Global GDP growth has surpassed projections from the November Report, and consumer price inflation in the euro area and the United States has declined more rapidly than anticipated. While there are upside risks to inflation due to events in the Middle East, it’s noted that oil and wholesale gas futures prices have fallen.
In the third quarter of 2023, the UK Gross Domestic Product (GDP) remained stagnant, aligning with the projection outlined in the November Report. Additionally, there was a 0.3% decline in GDP in October. Based on the latest official and survey data, the Bank staff anticipates that GDP growth will be largely flat in the fourth quarter of 2023 and in the upcoming quarters. The Committee is closely monitoring various data points related to labour market activity, noting a likely softening in employment growth and additional signs of some easing in the labour market.
Twelve-month Consumer Price Index (CPI) inflation dropped significantly from 6.7% in September to 4.6% in October. Services price inflation decreased to 6.6%, but caution is advised in interpreting this data as some components may not accurately signal underlying trends in services prices or the persistence of headline inflation. CPI inflation is anticipated to stay close to its current rate at the year’s end. Services price inflation is expected to temporarily rise in January due to base effects from weak price movements earlier in the year before gradually decreasing. The short-term CPI inflation path is somewhat lower than projected in the November Report, partly due to recent declines in energy prices.
Since the MPC’s last decision, CPI inflation has decreased as predicted, but there is downside news in private sector regular Average Weekly Earnings (AWE) growth. Despite this, indicators of UK inflation persistence remain high. Tighter monetary policy is contributing to a looser labour market and impacting the real economy. The substantial increase in Bank Rate during this tightening cycle has led to a currently restrictive monetary policy stance.
The MPC will continue to closely monitor indicators of persistent inflation and overall economic resilience, including labour market conditions, wage growth, and services price inflation. Monetary policy must remain sufficiently restrictive for a sustained period to bring inflation back to the 2% target in the medium term. The Committee, as per the November Monetary Policy Report, believes that monetary policy will likely need to remain restrictive for an extended period. Further tightening would be necessary if there is evidence of more persistent inflationary pressures.
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