Bank of England — Monetary Policy Report (UK, 2021)

Monetary Policy Committee Monetary Policy Report November 2021 Monetary Policy Report November 2021 Monetary policy at the Bank of England The objectives of monetary policy The Bank s Monetary Policy Committee (MPC) sets monetary policy to keep inflation low and stable, which supports growth and jobs. Subject to maintaining price stability, the MPC is also required to support the Government s economic policy. The Government has set the MPC a target for the 12-month increase in the Consumer Prices Index of 2%. The 2% inflation target is symmetric and applies at all times. The MPC s remit recognises, however, that the actual inflation rate will depart from its target as a result of shocks and disturbances, and that attempts to keep inflation at target in these circumstances may cause undesirable volatility in output. In exceptional circumstances, the appropriate horizon for returning inflation to target can vary. The MPC will communicate how and when it intends to return inflation to the target. The instruments of monetary policy The MPC currently uses two main monetary policy tools. First, we set the interest rate that banks and building societies earn on deposits, or  reserves , placed with the Bank of England   this is Bank Rate. Second, we can buy government and corporate bonds, financed by the issuance of central bank reserves   this is asset purchases or quantitative easing. The Monetary Policy Report The MPC is committed to clear, transparent communication. The Monetary Policy Report (MPR) is a key part of that. It allows the MPC to share its thinking and explain the reasons for its decisions. The Report is produced quarterly by Bank staff under the guidance of the members of the MPC. This Report has been prepared and published by the Bank of England in accordance with section 18 of the Bank of England Act 1998. The Monetary Policy Committee Andrew Bailey, Chair Ben Broadbent Jon Cunliffe Jonathan Haskel Catherine L Mann Huw Pill Dave Ramsden Michael Saunders Silvana Tenreyro PowerPoint  versions of the Monetary Policy Report charts and Excel spreadsheets of the data underlying most of them are available at www.bankofengland.co.uk/monetary-policy-report/2021/november-2021   Bank of England 2021 ISSN 2633-7819 Contents Monetary Policy Summary 1: The economic outlook Recent developments The MPC s projections 1.1: 1.2: 1.3: Key judgements and risks 1.4: Constant rates Box A: The influence of energy prices on the MPC s projections Box B: Monetary policy since the August Report 2: Current economic conditions 2.1: Global developments and financial conditions 2.2: Domestic activity 2.3: The labour market 2.4: Box C: Recent developments in medium-term measures of inflation expectations Box D: How has Blue Book 2021 changed past estimates of UK GDP growth? Box E: Agents  update on business conditions Inflation 3: In focus   Potential supply 3.1: How was potential supply evolving in the pre-Covid period? 3.2: How has Covid affected supply so far? 3.3: How is potential supply likely to evolve? 3.4: The MPC s projections for supply Annex: Other forecasters  expectations Glossary and other information i 1 1 2 7 11 13 17 18 19 23 27 31 34 36 38 41 42 42 43 49 50 51 Monetary Policy Report November 2021 Monetary Policy Summary i Monetary Policy Summary The Bank of England s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 2 November 2021, the Committee judged that the existing stance of monetary policy remained appropriate. The MPC voted by a majority of 7 2 to maintain Bank Rate at 0.1%. The Committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at  20 billion. The Committee voted by a majority of 6 3 for the Bank of England to continue with its existing programme of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at  875 billion and so the total target stock of asset purchases at  895 billion. The Committee s updated central projections for activity and inflation are set out in the accompanying November Monetary Policy Report. The projections are conditioned on asset and energy prices averaged over the 15 days to 27 October. This gives a market-implied path for Bank Rate that rises to around 1% by the end of 2022. Wholesale energy prices are assumed to be based on their respective futures curves for the first six months of the projections and remain flat beyond that. There are material risks around this assumption. Both global and UK GDP increased in 2021 Q3, although at a slower pace than projected in the August Report. Growth is somewhat restrained by disruption in supply chains. Alongside the rapid pace at which global demand for goods has risen, this has led to supply bottlenecks in certain sectors. There have also been some signs of weaker UK consumption demand. While bottlenecks will continue to restrain growth somewhat in the near term, global and UK GDP are nonetheless expected to recover further from the effects of Covid-19 (Covid). UK GDP is projected to get back to its 2019 Q4 level in 2022 Q1. Over the second half of the forecast period, and conditioned on the market-implied path for Bank Rate, UK GDP growth is expected to be relatively subdued. The pace of growth slows as potential supply growth eases back towards pre-Covid rates, and as higher energy prices and the fading of monetary and fiscal policy support temper demand growth. At the Autumn Budget and Spending Review 2021, the Government announced a higher path for government consumption, particularly over the next couple of years. By the end of the forecast period, a margin of spare capacity is expected to emerge. The Labour Force Survey unemployment rate fell to 4.5% in the three months to August, while Her Majesty s Revenue and Customs payroll data have continued to rise strongly. Just over a million jobs are likely to have been furloughed immediately before the Coronavirus Job Retention Scheme closed at end-September, significantly more than expected in the August Report. Nonetheless, there have continued to be few signs of increases in redundancies and the stock of vacancies has increased further, as have indicators of recruitment difficulties. Taken together, while there is considerable uncertainty, initial indicators suggest that unemployment will rise slightly in 2021 Q4. Bank staff s estimate of underlying pay growth has remained above pre-pandemic rates, although pay growth is expected to fall back from its current rate in the November Report central projections. Twelve-month CPI inflation fell slightly from 3.2% in August to 3.1% in September. Bank staff expect inflation to rise to just under 4% in October, accounted for predominantly by the impact on utility bills of past strength in wholesale gas prices. CPI inflation is then expected to rise to 4 % in November and remain around that level through the winter, accounted for by further increases in core goods and food price inflation. Wholesale gas prices have risen Monetary Policy Report November 2021 Monetary Policy Summary ii sharply since August. CPI inflation is now expected to peak at around 5% in April 2022, materially higher than expected in the August Report. The upward pressure on CPI inflation is expected to dissipate over time, as supply disruption eases, global demand rebalances, and energy prices stop rising. As a result, CPI inflation is projected to fall back materially from the second half of next year. Conditioned on the market-implied path for Bank Rate and the MPC s current forecasting convention for future energy prices, CPI inflation is projected to be a little above the 2% target in two years  time and just below the target at the end of the forecast period. In an alternative scenario that is conditioned on energy prices following forward curves throughout the forecast period and as set out in the November Report, CPI inflation falls back towards the target more rapidly than in the MPC s central projection, and is materially lower over the second half of the forecast period. 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 also recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. In the recent unprecedented circumstances, the economy has been subject to very large shocks. Given the lag between changes in monetary policy and their effects on inflation, the Committee, in judging the appropriate policy stance, will as always focus on the medium-term prospects for inflation, including medium-term inflation expectations, rather than factors that are likely to be transient. At its recent meetings, the Committee has judged that some modest tightening of monetary policy over the forecast period was likely to be necessary to meet the 2% inflation target sustainably in the medium term. The latest developments, set alongside the Committee s updated projections, reinforce this view. Nevertheless, near-term uncertainties remain, especially around the outlook for the labour market, and the extent to which domestic cost and price pressures persist into the medium term. At this meeting, the Committee concluded that the existing stance of monetary policy remained appropriate. The Committee judges that, provided the incoming data, particularly on the labour market, are broadly in line with the central projections in the November Monetary Policy Report, it will