February 3, 2023
The Bank of England’s Monetary Policy Committee (MPC) at its February 1, 2023 meeting voted to increase Bank Rate by 0.5 percentage points, to 4%, as opposed to maintaining the Bank Rate at 3.5%. The MPC sets monetary policy to meet the 2% inflation target, to aid in sustaining growth and employment.
Consumer price inflation remains high globally, although it is likely to have peaked in the United Kingdom and across many advanced economies. Recently, wholesale gas prices have declined, and global supply chain disruption seems to have eased amid a slowing in global demand. Despite market pricing indicating reductions in policy rates further ahead, many central banks have continued to tighten monetary policy.
UK domestic inflationary pressures have been firmer than expected. Both private sector regular pay growth and services CPI inflation have been notably higher than forecast in the November Monetary Policy Report. Although the labour market has started to loosen and some indicators of wage growth have eased, alongside a gradual decline in underlying output, the labour market remains tight by historical standards. The increases in Bank Rate since December 2021 are expected to have an increasing impact on the economy in the coming quarters.
The MPC’s updated projections in the February Monetary Policy Report, shows CPI inflation declining sharply from its current high of 10.5% in December. Annual CPI inflation is expected to fall to around 4% towards the end of 2023, alongside a much lower projected decline in output than in the November Report forecast.
The Bank of England noted that, “In the latest modal forecast, conditioned on a market-implied path for Bank Rate that rises to around 4½% in mid-2023 and falls back to just over 3¼% in three years’ time, an increasing degree of economic slack, alongside falling external pressures, leads CPI inflation to decline to below the 2% target in the medium term”. The Committee continues to judge that the risks to inflation are skewed significantly to the upside as there are considerable uncertainties around this medium-term outlook.
The UK monetary policy framework recognizes that occasionally, inflation will depart from the target as the economy has been subject to a sequence of very large overlapping shocks and disturbances. The extent to which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate to date.
The Bank of England further highlighted, “There are considerable uncertainties around the outlook. The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation. If there were to be evidence of more persistent pressures, then the MPC will adjust Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit”.
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