February 1, 2024
The Bank of England’s Monetary Policy Committee (MPC) at its meeting ended January 31, 2024, voted to maintain the Bank Rate at 5.25%, as opposed to increasing or decreasing the bank rate by 0.25 percentage points. The MPC believes that the bank rate will help sustain growth and employment, and ultimately meet the 2% inflation target.
Since the last MPC meeting, global GDP growth has remained subdued, with stronger activity in the United States. Inflationary pressures are easing in the euro area and the United States, and wholesale energy prices have significantly declined. Despite recent weaknesses, there’s an anticipation of gradual GDP growth during the forecast period, largely due to a diminishing drag from previous Bank Rate increases. Business surveys indicate an improving outlook for near-term economic activity. However, material risks persist from developments in the Middle East and potential disruptions to shipping in the Red Sea. Also, the labour market is easing but remains historically tight. Despite subdued supply growth, persistent demand weakness is anticipated to create economic slack in the first half of the forecast period, causing a further increase in unemployment.
In December 2023, twelve-month CPI inflation dropped to 4.0%, below expectations from the November Report, mainly due to lower fuel, core goods, and services price inflation. Despite still being elevated, wage growth has eased across various measures and is expected to decline further in the upcoming quarters. CPI inflation is forecasted to temporarily reach the 2% target in 2024 Q2 before a subsequent increase in Q3 and Q4. This shift is attributed to developments in the direct energy price contribution to 12-month inflation, which becomes less negative. The MPC’s latest modal projection, considering a lower market-implied Bank Rate path, suggests CPI inflation around 2¾% by the end of the year, remaining above target for most of the forecast period due to persistent domestic inflationary pressures despite increasing economic slack. Projections indicate CPI inflation at 2.3% in two years and 1.9% in three years.
The Committee sees risks to its CPI inflation projection skewed to the upside in the first half of the forecast period due to geopolitical factors. However, domestic price and wage pressures are now viewed as more evenly balanced, eliminating the difference between the MPC’s modal and mean projections at the two and three-year horizons. In an alternative scenario with constant interest rates at 5.25%, the path for CPI inflation diverges significantly from the modal projection, falling below the 2% target from 2025 Q4 onwards.
Headline CPI inflation has dropped notably, and the current restrictive monetary policy is impacting the real economy, resulting in a more relaxed labour market. In the February forecast, inflation risks are seen as balanced, despite services price inflation and wage growth decreasing more than anticipated. As such, 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. The Committee, as per the February Monetary Policy Report, believes that monetary policy will likely need to remain sufficiently restrictive for an extended period to bring inflation back to the 2% target in the medium term. Further tightening would be necessary if there is evidence of more persistent inflationary pressures.
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