Bank of England — Monetary Policy Report (UK, 2024)

Bank of England Monetary Policy Report Monetary Policy Committee November 2024 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. Bank of England Page 1 The Monetary Policy Committee   Andrew Bailey, Chair   Sarah Breeden   Swati Dhingra   Megan Greene   Clare Lombardelli   Catherine L Mann   Huw Pill   Dave Ramsden   Alan Taylor PowerPoint  versions of the Monetary Policy Report charts and Excel spreadsheets of the data underlying most of them are available at http://www.bankofengland.co.uk/monetary- policy-report/2024/november-2024.   Bank of England 2024 ISSN 2633-7819 Bank of England Page 2 Contents Monetary Policy Summary 1: The economic outlook 1.1: The conditioning assumptions underlying the MPC s projections 1.2: Key judgements and risks Box A: Alternative cases for the persistence of domestic inflationary pressures Box B: Autumn Budget 2024 Box C: Monetary policy since the August 2024 Report 2: Current economic conditions 2.1: Global economy and financial markets 2.2: Credit conditions 2.3: Domestic activity 2.4: The labour market and slack 2.5: Inflation and wages Box D: The shifting effects of global export prices on UK inflation Box E: Developments in household savings Box F: Agents  update on business conditions Annex: Other forecasters  expectations Glossary and other information 4 6 7 9 22 26 30 32 34 40 46 50 55 68 73 81 85 87 Bank of England Page 3 Monetary Policy Summary The Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. The MPC adopts a medium-term and forward- looking approach to determine the monetary stance required to achieve the inflation target sustainably. At its meeting ending on 6 November 2024, the MPC voted by a majority of 8 1 to reduce Bank Rate by 0.25 percentage points, to 4.75%. One member preferred to maintain Bank Rate at 5%. There has been continued progress in disinflation, particularly as previous external shocks have abated, although remaining domestic inflationary pressures are resolving more slowly. CPI inflation fell to 1.7% in September but is expected to increase to around 2 % by the end of the year as weakness in energy prices falls out of the annual comparison. Services consumer price inflation has declined to 4.9%. Annual private sector regular average weekly earnings growth has continued to fall but remained elevated at 4.8% in the three months to August. Headline GDP growth is expected to fall back to its recent underlying pace of around  % per quarter over the second half of this year. The MPC judges that the labour market continues to loosen, although it appears relatively tight by historical standards. Monetary policy has been guided by the need to squeeze remaining inflationary pressures out of the economy to achieve the 2% target both in a timely manner and on a lasting basis. The Committee s deliberations have been supported by the consideration of a range of cases that could impact the evolution of inflation persistence. These three cases are set out further in the accompanying November Monetary Policy Report. In the first case, most of the remaining persistence in inflation may dissipate quickly as pay and price- setting dynamics continue to normalise following the unwinding of the global shocks that drove up inflation. In the second case, a period of economic slack may be required to normalise these dynamics fully. In the third case, some inflationary persistence may also reflect structural shifts in wage and price-setting behaviour. Each case would have different implications for how quickly the restrictiveness of monetary policy could be withdrawn. The MPC s latest projections for activity and inflation are also set out in the accompanying November Report. This forecast is based on the second case. CPI inflation is projected to fall back to around the 2% target in the medium term, conditioned on the usual 15 day average of forward interest rates, as a margin of slack emerges later in the forecast period that acts against second-round effects in domestic prices and wages. The combined effects of the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP by around  % at their peak in a year s time, relative to the August projections. The Budget is provisionally expected to boost CPI inflation by just under   of a Bank of England Page 4 percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures. There remains significant uncertainty around the outlook for the labour market. Data are difficult to interpret and wage growth has been more elevated than usual relationships would predict. The impact of the Budget announcements on inflation will depend on the degree to and speed with which these higher costs pass through into prices, profit margins, wages and employment. At this meeting, the Committee voted to reduce Bank Rate to 4.75%, reflecting the continued progress in disinflation. Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further. The Committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting. Bank of England Page 5 1: The economic outlook Twelve-month CPI inflation was at the MPC s 2% target in 2024 Q3. Headline GDP growth is expected to fall back to its recent underlying pace of around  % per quarter in the second half of this year. As set out in Box B, the combined effects of the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP by around  % at their peak in a year s time, relative to the August Monetary Policy Report projections. The Budget is provisionally expected to boost CPI inflation by just under   of a percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures. In the forecast described in Section 1.2, four-quarter GDP growth is expected to pick up to almost 1 % in the first part of the forecast period, before falling back slightly (Key judgement 1). Aggregate demand and supply are judged to be broadly in balance currently and to remain so over the coming year. A margin of economic slack is projected to emerge during 2026 in part reflecting the overall tightening in the stance of fiscal policy assumed in the Budget, and also the continued restrictive stance of monetary policy (Key judgement 2). Unemployment is expected to rise slightly in the second half of the forecast period. There remains significant uncertainty around the labour market outlook. CPI inflation is expected to increase to around 2 % by the second half of 2025 as weakness in energy prices falls out of the annual comparison, revealing more clearly the continuing persistence of domestic inflationary pressures. In the projection, second-round effects in domestic prices and wages are expected to take somewhat longer to unwind than they did to emerge (Key judgement 3). The margin of slack that emerges later in the forecast period is sufficient to act against those second-round effects, leading CPI inflation to fall back to around the 2% target in the medium term, conditioned on the usual 15 day average of forward interest rates. This forecast also incorporates a higher projection for import price inflation. Private sector regular AWE growth is expected to fall further and to reach around 3% by the start of 2026, remaining close to that level thereafter. The Committee s deliberations have been supported by the consideration of a range of cases for the state of the economy. The MPC has considered alternative cases for how the persistence of inflationary pressures may evolve (Box A). In these cases, i