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

Bank of England Monetary Policy Report Monetary Policy Committee February 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. Page 1Bank of England 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/2024/february-2024.   Bank of England 2024 ISSN 2633-7819 Page 2Bank of England 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: Fiscal policy since the November Monetary Policy Report Box B: Monetary policy since the November 2023 Report 2: Current economic conditions 2.1: Global developments and monetary and financial conditions 2.2: Domestic activity and the labour market 2.3: Wage growth and inflation 2.4: Inflation expectations Box C: Assessing the restrictiveness of the monetary policy stance Box D: Agents  update on business conditions 3: In focus   The supply side of the economy 3.1: What is potential supply? 3.2: How has potential supply responded to past shocks? 3.3: How might potential supply evolve in the future? 3.4: Potential supply and spare capacity in the MPC s forecast Annex: Other forecasters  expectations Glossary and other information 4 6 8 10 25 27 29 31 41 47 56 58 63 70 70 71 78 85 87 89 Page 3Bank of England 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 31 January 2024, the MPC voted by a majority of 6 3 to maintain Bank Rate at 5.25%. Two members preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%. The Committee s updated projections for activity and inflation are set out in the accompanying February Monetary Policy Report. These are conditioned on a market-implied path for Bank Rate that declines from 5 % to around 3 % by the end of the forecast period, almost 1 percentage point lower on average than in the November Report. Since the MPC s previous meeting, global GDP growth has remained subdued, although activity continues to be stronger in the United States. Inflationary pressures are abating across the euro area and United States. Wholesale energy prices have fallen significantly. Material risks remain from developments in the Middle East and from disruption to shipping through the Red Sea. Following recent weakness, GDP growth is expected to pick up gradually during the forecast period, in large part reflecting a waning drag on the rate of growth from past increases in Bank Rate. Business surveys are consistent with an improving outlook for activity in the near term. The labour market has continued to ease, but remains tight by historical standards. In the February Report projections, the continuing relative weakness of demand, despite subdued supply growth by historical standards, leads a margin of economic slack to emerge during the first half of the forecast period. Unemployment is expected to rise somewhat further. Twelve-month CPI inflation fell to 4.0% in December 2023, below expectations in the November Report. This downside news has been broad-based, reflecting lower fuel, core goods and services price inflation. Although still elevated, wage growth has eased across a number of measures and is projected to decline further in coming quarters. CPI inflation is projected to fall temporarily to the 2% target in 2024 Q2 before increasing again in Q3 and Q4. This profile of inflation over the second half of the year is accounted for by developments in the direct energy price contribution to 12-month inflation, which becomes less negative. In the MPC s latest most likely, or modal, projection conditioned on the lower market-implied path for Bank Rate, CPI inflation is around 2 % by the end of this year. It then remains above target over nearly all of the remainder of the forecast period. This reflects the persistence of domestic inflationary pressures, despite an increasing degree of slack in the economy. CPI inflation is projected to be 2.3% in two years  time and 1.9% in three years. The Committee judges that the risks around its modal CPI inflation projection are skewed to the upside over the first half of the forecast period, stemming from geopolitical factors. It now judges that the risks from domestic price and wage pressures are more evenly balanced, meaning that, unlike in Page 4Bank of England previous forecasts, there is no difference between the MPC s modal and mean projections at the two and three-year horizons. Conditioned on the alternative assumption of constant interest rates at 5.25%, the path for CPI inflation is significantly lower than in the Committee s modal projection conditioned on the declining path of market rates, falling below the 2% target from 2025 Q4 onwards. 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. At this meeting, the Committee voted to maintain Bank Rate at 5.25%. Headline CPI inflation has fallen back relatively sharply. The restrictive stance of monetary policy is weighing on activity in the real economy and is leading to a looser labour market. In the Committee s February forecast, the risks to inflation are more balanced. Although services price inflation and wage growth have fallen by somewhat more than expected, key indicators of inflation persistence remain elevated. As a result, monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates. The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably. It will therefore 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. On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level. Page 5Bank of England 1: The economic outlook Twelve-month CPI inflation remains above the MPC s 2% target but declined to 4.2% in 2023 Q4. This was below expectations in the November Report, with broad-based downside news in the contributions from fuel, core goods and services prices. CPI inflation is now projected to fall temporarily to the 2% target in 2024 Q2 before increasing again in Q3 and Q4. This profile of inflation over the second half of the year is accounted for by developments in the direct energy price contribution to 12-month inflation, which becomes less negative. CPI inflation excluding energy is projected to remain above the target throughout this period, at around 3% (Chart 1.1). Annual private sector regular average weekly earnings (AWE) growth declined to 6.5% in the three months to November, around 1 percentage point below the expectation in the November Report. This has brought the AWE measure back into line with the steer from other indicators of annual pay growth. The near-term outlook for pay growth is weaker than projected in November, but it remains elevated. The Committee continues to expect second-round effect