January 12, 2023
Since the November Monetary Policy Report and the preceding Bank of England’s Monetary Policy Committee (MPC) meeting, decided on the elevated path of market interest rates at the time, the UK economy was expected to be in recession for a prolonged period and CPI inflation was expected to remain very high in the near term.
Inflation was expected to sharply decline from mid-2023 below the 2% target in years two and three of the projection, reflecting a negative contribution from energy prices, as well as the emergence of an increasing degree of economic slack and a steadily rising unemployment rate. The risks around that declining path for inflation were judged to be to the upside.
Domestic wage and price pressure heightened, however there has been limited news in other domestic and global economic data relative to the November Report projections.
Although global inflationary pressures remain elevated, most indicators of global supply chain bottlenecks have eased, and advanced-economy government bond yields have declined at longer maturities. The sterling effective exchange rate has appreciated by almost 2¾%. Also, UK fixed-term mortgage rates have reduced since the Committee’s previous meeting, but rates remain materially higher than in the summer.
Although the labour demand has started to ease, the labour market remains tight. The unemployment rate rose slightly to 3.7% in the three months to October. Vacancies fell back, but the vacancies-to-unemployment ratio remains at a very elevated level.
Considering these factors, The Committee voted to increase Bank Rate by 0.5 percentage points, to 3.5%. The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response. Should the economy evolve broadly in line with the projections, further increases in Bank Rate may be required for a sustainable return of inflation to the 2% target. According to the Bank of England, The Committee will decide the next appropriate level of Bank Rate on February 2, 2023.
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