June 22, 2023
The Bank of England’s Monetary Policy Committee (MPC) at its June 21, 2023 meeting voted to increase Bank Rate by 0.50 percentage points, to 5.00%, as opposed to maintaining the Bank Rate at 4.50%.
The MPC observes that the second-round effects in domestic price and wage developments generated by external cost shocks are likely to take longer to unwind than they did to emerge. Additionally, there has been significant upside news in recent data that indicates more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand. Consequently, The MPC sets monetary policy in line with its remit to meet the 2% inflation target sustainably in the medium term, to aid in supporting growth and employment.
It was noted that at the time of the previous MPC meeting and May Monetary Policy Report, the market-implied path for Bank Rate averaged just over 4% over the next three years. Since then, gilt yields have risen materially, particularly at shorter maturities, now suggesting a path for Bank Rate that averages around 5½%. Mortgage rates have also risen notably. The sterling effective exchange rate has appreciated further.
The MPC highlighted, “Business surveys continue to suggest underlying quarterly GDP growth of around ¼% during the middle of this year. Indicators of household spending have tended to strengthen a little. LFS employment increased by 0.8% in the three months to April, higher than expected at the time of the May Report. The counterpart to this strong employment growth has been a further fall in the inactivity rate. The unemployment rate has been flat at 3.8%, in line with the May Report. The vacancies-to-unemployment ratio has fallen further but remains significantly elevated.”
Furthermore, “CPI inflation is expected to fall significantly further during the course of the year, in the main reflecting developments in energy prices. Services CPI inflation is projected to remain broadly unchanged in the near term. Core goods CPI inflation is expected to decline later this year, supported by developments in cost and price indicators earlier in the supply chain. In particular, annual producer output price inflation has fallen very sharply in recent months. Food price inflation is projected to fall further in coming months.”
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. However, the pace at which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far.
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