The Bank of England’s Monetary Policy Committee sets monetary policy to meet the 2% inflation target, and in a way that helps support growth and employment. At its meeting ending January 31, 2024, the Monetary Policy Committee voted 6-3 to maintain the bank rate at 5.25%. Two members favored increasing the bank interest rate by 0.25 percentage points to 5.5%. One member preferred reducing the bank interest rate by 0.25 percentage points to 5%.
The Committee’s updated forecasts for activity and inflation are contained in the accompanying February Monetary Policy Report. These are conditional on a market-implied path for the bank rate falling from 5¼% to around 3¼% by the end of the forecast period, about 1 percentage point lower on average than in the November report.
Since the previous MPC meeting, global GDP growth has remained weak, although activity remains stronger in the United States. Inflationary pressures are easing across the Eurozone and the United States. Wholesale energy prices have fallen significantly. There remain physical risks resulting from developments in the Middle East and from disruption to shipping through the Red Sea.
Following recent weakness, GDP growth is expected to gradually recover over the forecast period, largely reflecting easing pressure on the growth rate from previous bank rate increases. Business surveys are consistent with an improving outlook for activity in the near term.
The labor market continued to decline but remained tight by historical standards. In the February report forecast, continued relative weakness in demand, despite weak supply growth by historical standards, results in a margin of economic stagnation during the first half of the forecast period. Unemployment rates are expected to rise somewhat.
Decreased inflation in the CPI
Twelve-month CPI inflation fell to 4.0% in December 2023, below expectations in the November report. This negative news has been widespread, reflecting lower inflation in fuel prices, basic goods and services. Although wage growth remains high, it has declined across a number of measures and is expected to decline further in the coming quarters.
CPI inflation is expected to fall temporarily to the 2% target in the second quarter of 2024 before rising again in the third and fourth quarters. This profile of inflation over the second half of the year is accounted for by developments in the direct contribution of energy prices to 12-month inflation, which has become less negative. In the latest MPC forecast, the most likely, or conditional, forecast is conditional on the market-implied lower path for the bank interest rate.
CPI inflation will average around 2¾% by the end of this year. It then remains above target for approximately the remainder of the forecast period. This reflects continued domestic inflationary pressures, despite the increasing degree of recession in the economy. CPI inflation is expected to reach 2.3% within two years and 1.9% within three years.
The Committee believes that the risks surrounding its model CPI inflation forecast are tilted to the upside during the first half of the forecast period, due to geopolitical factors. It now sees risks from domestic price and wage pressures as more balanced, meaning that, contrary to previous expectations, there is no difference between the MPC’s conditional forecasts and the two- or three-year average.
The Monetary Policy Committee and the priority of price stability
The MPC’s remit is clear that the inflation target applies at all times, reflecting the priority of price stability within the UK’s monetary policy framework. The framework recognizes that there will be occasions when inflation deviates from target as a result of shocks and disturbances. Monetary policy will ensure that CPI inflation returns to the 2% target sustainably over the medium term.
At this meeting, the committee voted to keep the bank’s interest rate at 5.25%. Headline CPI inflation fell relatively sharply. The restrictive stance of monetary policy affects activity in the real economy and leads to a more flexible labor market. In the Committee’s forecasts for February, risks to inflation have become more balanced. Although service price inflation and wage growth were somewhat lower than expected, leading indicators of persistent inflation remain high.
As a result, monetary policy will need to remain tight long enough to return inflation to the 2% target sustainably in the medium term, in line with the terms of reference of the Monetary Policy Committee. The Committee has held the view since last fall that monetary policy should be restrictive for an extended period of time until the risk of inflation above the 2% target dissipates.
The Monetary Policy Committee remains ready to adjust monetary policy as required by economic data to return inflation to the 2% target in a sustainable manner. Therefore, the Fund will continue to closely monitor indicators of persistent inflationary pressures and the resilience of the economy as a whole, including a range of measures related to the underlying tightening of labor market conditions, wage growth, and service price inflation. On this basis, the Committee will keep under review how long the bank rate should remain at its current level.
Minutes of the Monetary Policy Committee meeting ending January 31, 2024
1: Before moving to its immediate political decision, the Committee discussed: the international economy; Monetary and financial conditions. Demand and production. Supply, costs and prices. The latest data on these topics are contained in the accompanying February 2024 Monetary Policy Report.
2: Consumer price inflation across major advanced economies fell more than expected in the November report, with inflation in prices for goods and services continuing to decline. The committee compared the characteristics of the decline in inflation witnessed in the United States, the Eurozone and the United Kingdom and the risks surrounding inflation expectations. The committee considered that the observed discrepancy between economies reflects differences in the dynamics of energy prices and differences in the impact and timing of recent global shocks and their subsequent dissipation, in addition to distinct features of spare capacity. The decline in commodity price inflation has been relatively more pronounced so far in the United States, because in the euro area and the United Kingdom, the gap between lower producer price inflation and core consumer goods inflation has shown signs that it may have been longer than in previous cycles.
3: There were also some differences, as well as commonalities, in the evolution of service price inflation and wage growth in these economies. The Bank’s expert analysis suggests that the recent decline in services inflation across the three economies is largely due to lower non-labor input costs, including energy. By contrast, labor costs have remained high across countries, although some signs of decline are showing, especially in the United States. As broadly comparable as they were, measures of wage inflation remained much higher in the UK than elsewhere.