Bank holds interest rate amid slowing inflation
The Bank of England has decided to keep interest rates on hold for a second consecutive month amid signs of weakening inflation and wage growth.
Its Monetary Policy Committee voted by a majority of 6–3 to maintain Bank Rate at 5.25%. Three members wanted to increase Bank Rate by 0.25 percentage points, to 5.5%.
It expects the rate to remain at around around 5.25% until the autumn of 2024 when it should begin to fall to 4.25% by the end of 2026, a lower profile than underpinned the August projections.
Chancellor Jeremy Hunt said: “Inflation is falling, wages are rising and the economy is growing. The UK has been far more resilient than many expected, but the best way to deliver prosperity is through sustainable growth.
“The Autumn Statement will set out how we will boost economic growth by unlocking private investment, getting more Brits back to work, and delivering a more productive British state.”
Since the MPC’s previous meeting, long-term government bond yields have increased across advanced economies. GDP growth has been stronger than expected in the United States. Underlying inflationary pressures in advanced economies remain elevated. Following events in the Middle East, the oil futures curve has risen while gas futures prices are little changed.
UK GDP is expected to have been flat in 2023 Q3, weaker than projected in the August Report. Some business surveys are pointing to a slight contraction of output in Q4 but others are less pessimistic. GDP is expected to grow by 0.1% in Q4, also weaker than projected previously.
The MPC continues to consider a wide range of data to inform its view on developments in labour market activity, rather than focusing on a single indicator.
It said the increasing uncertainties surrounding the Labour Force Survey underline the importance of this approach. Against a backdrop of subdued economic activity, employment growth is likely to have softened over the second half of 2023, and to a greater extent than projected in the August Report.
Falling vacancies and surveys indicating an easing of recruitment difficulties also point to a loosening in the labour market. Contacts of the Bank’s agents have similarly reported an easing in hiring constraints, although persistent skills shortages remain in some sectors.
Pay growth has remained high across a range of indicators, although the recent rise in the annual rate of growth of private sector regular average weekly earnings has not been apparent in other series. There remains uncertainty about the near-term path of pay, but wage growth is nonetheless projected to decline in coming quarters from these elevated levels.
Twelve-month CPI inflation fell to 6.7% both in September and 2023 Q3, below expectations in the August Report. This downside news largely reflects lower-than-expected core goods price inflation.
At close to 7%, services inflation has been only slightly weaker than expected in August. CPI inflation remains well above the 2% target, but is expected to continue to fall sharply, to 4.75% in in the next quarter, 4.5% in 2024 Q1, and 3.75% in 2024 Q2. This decline is expected to be accounted for by lower energy, coregoods and food price inflation and, beyond January, by some fall in services inflation.
In the MPC’s latest most likely projection inflation returns to the 2% target by the end of 2025. It then falls below the target thereafter, as an increasing degree of economic slack reduces domestic inflationary pressures.
The committee continues to judge that the risks to its inflation projection are skewed to the upside. There are also upside risks to inflation from energy prices given events in the Middle East.
The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. Monetary policy will ensure that CPI inflation returns to the 2% target sustainably in the medium term.
Since the MPC’s previous decision, there has been little news in key indicators of UK inflation persistence. There have continued to be signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally. Given the significant increase in Bank Rate since the start of this tightening cycle, the current monetary policy stance is restrictive.
The MPC said it will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation.
Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit.
The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.