March 23, 2023

The Bank of England’s Monetary Policy Committee (MPC) at its March 22, 2023 meeting voted to increase Bank Rate by 0.25 percentage points, to 4.25%, as opposed to maintaining the Bank Rate at 4%. The MPC sets monetary policy to meet the 2% inflation target, to aid in sustaining growth and employment.

Core consumer price inflation remains elevated in many advanced economies and global growth is expected to be stronger than projected in the February Monetary Policy Report. Recently, wholesale futures and oil prices have declined.

The Monetary Policy Summary outlined, “There have been large and volatile moves in global financial markets since the failure of Silicon Valley Bank and in the run-up to UBS’s purchase of Credit Suisse and reflecting market concerns about the possible broader impact of these events. Overall, government bond yields are broadly unchanged and risky asset prices are somewhat lower than at the time of the Committee’s previous meeting.”

Additionally, “The Bank of England’s Financial Policy Committee (FPC) has briefed the MPC about recent global banking sector developments. The FPC judges that the UK banking system maintains robust capital and strong liquidity positions and is well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates. The FPC’s assessment is that the UK banking system remains resilient.” As a result, bank wholesale funding costs have risen in the United Kingdom and other advanced economies. The MPC noted that it will continue to monitor closely any effects on the credit conditions faced by households and businesses, and the impact on the macroeconomic and inflation outlook.

GDP is still likely to have been broadly flat around the turn of the year but is now expected to increase slightly in the second quarter, compared with the 0.4% decline anticipated in the February Report. The labour market has remained tight, while the news since the MPC’s previous meeting points to stronger-than-expected employment growth in 2023 Q2 and a flat rather than rising unemployment rate.

CPI inflation is still expected to fall significantly in 2023 Q2, to a lower rate than anticipated in the February Report. Services CPI inflation is expected to remain broadly unchanged in the near term, but wage growth is likely to fall back somewhat more quickly than projected in the February Report.

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. Uncertainties around the financial and economic outlook have risen.

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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