Bank of England — Monetary Policy Report (UK, 2023)

Bank of England Monetary Policy Report Monetary Policy Committee November 2023 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   Ben Broadbent   Swati Dhingra   Megan Greene Jonathan Haskel     Catherine L Mann   Huw Pill   Dave Ramsden 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/2023/november-2023.   Bank of England 2023 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: Monetary policy since the August 2023 Report 2: Current economic conditions 2.1: Global developments and domestic credit conditions 2.2: Domestic activity and the labour market 2.3: Wage growth and inflation 2.4: Inflation expectations Box B: Uncertainties around official estimates of labour market activity Box C: How has Blue Book 2023 changed past estimates of UK GDP growth? Box D: Agents  update on business conditions 3: In focus   The outlook for demand 3.1: Recent developments in GDP 3.2: Key factors supporting the resilience in demand 3.3: The impact of higher interest rates on demand 3.4: Conclusion Annex: Other forecasters  expectations Glossary and other information 4 7 9 10 32 34 36 44 52 61 65 70 72 78 78 79 87 99 100 102 Bank of England Page 3 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 1 November 2023, the MPC voted by a majority of 6 3 to maintain Bank Rate at 5.25%. Three members preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. The Committee s updated projections for activity and inflation are set out in the accompanying November Monetary Policy Report. These are conditioned on a market- implied path for Bank Rate that remains around 5 % until 2024 Q3 and then declines gradually to 4 % by the end of 2026, a lower profile than underpinned the August projections. 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 somewhat 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. 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 Bank of England Page 4 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 % in 2023 Q4, 4 % in 2024 Q1 and 3 % in 2024 Q2. This decline is expected to be accounted for by lower energy, core goods and food price inflation and, beyond January, by some fall in services inflation. In the MPC s latest most likely, or modal, projection conditioned on the market-implied path for Bank Rate, CPI 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 modal inflation projection are skewed to the upside. Second-round effects in domestic prices and wages are expected to take longer to unwind than they did to emerge. There are also upside risks to inflation from energy prices given events in the Middle East. Taking account of this skew, the mean projection for CPI inflation is 2.2% and 1.9% at the two and three-year horizons respectively. Conditioned on the alternative assumption of constant interest rates at 5.25%, which is a higher profile than the market curve beyond the second half of 2024, mean CPI inflation returns to target in two years  time and falls to 1.6% at the three-year horizon. 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. At this meeting, the Committee voted to maintain Bank Rate at 5.25%. Bank of England Page 5 The MPC 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. Bank of England Page 6 1: The economic outlook Twelve-month CPI inflation remains well above the MPC s 2% target, but has fallen back to 6.7% both in September and in 2023 Q3 as a whole, below expectations in the August Monetary Policy Report. Most of the downside news since the previous Report reflects lower core goods price inflation. Services inflation has been only slightly weaker than expected in August and remains elevated. CPI inflation is expected to continue to fall quite sharply in the near term, to an average of around 4 % in 2023 Q4, 4 % in 2024 Q1 and 3 % in 2024 Q2. Most indicators of pay growth have tended to be stable at rates of growth that are high. But they have not shown the recent rise in the annual rate of growth of the private sector regular AWE series. Earnings growth is expected to be somewhat stronger than in the August Report, but is still projected to decline in coming quarters from these elevated l