Bank of England — Monetary Policy Report (UK, 2022)

Monetary Policy Committee Monetary Policy Report February 2022 Monetary Policy Report February 2022 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/2022/february-2022   Bank of England 2022 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 Box A: Monetary policy since the November 2021 Report 2: Current economic conditions Inflation 2.1: Global developments and financial conditions 2.2: Domestic activity 2.3: The labour market 2.4: Box B: How are global bottlenecks in goods markets evolving, and what might that mean for inflation? Box C: How do changes in Bank Rate affect the interest rates facing households and firms? Box D: Agents  update on business conditions 3: In focus   Wages and inflation 3.1: What do the latest data tell us about wage growth? 3.2: What factors might have driven underlying wage growth above pre-pandemic rates? 3.3: How are underlying wage growth and inflation expected to evolve over the forecast period? Annex: Other forecasters  expectations Glossary and other information i 1 2 3 9 13 14 15 18 21 23 28 31 34 37 38 38 40 43 44 Monetary Policy Report February 2022 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 February 2022, the MPC voted by a majority of 5 4 to increase Bank Rate by 0.25 percentage points, to 0.5%. Those members in the minority preferred to increase Bank Rate by 0.5 percentage points, to 0.75%. The Committee voted unanimously for the Bank of England to begin to reduce the stock of UK government bond purchases, financed by the issuance of central bank reserves, by ceasing to reinvest maturing assets. The Committee also voted unanimously for the Bank of England to begin to reduce the stock of sterling non financial investment grade corporate bond purchases, financed by the issuance of central bank reserves, by ceasing to reinvest maturing assets and by a programme of corporate bond sales to be completed no earlier than towards the end of 2023 that should unwind fully the stock of corporate bond purchases. The Committee s updated central projections for activity and inflation are set out in the accompanying February Monetary Policy Report. The projections are conditioned on a market implied path for Bank Rate that rises to around 1 % by the middle of 2023. Wholesale energy prices are assumed to follow their respective futures curves for the first six months of the projections and remain constant beyond that, in contrast to futures curves, which are downward sloping over coming years. There are material risks around this assumption. Global and UK activity returned to their pre Covid 19 (Covid) levels towards the end of last year. The emergence of the Omicron variant is expected to have depressed activity somewhat in December and January. But its economic impact is likely to be limited and of short duration, and UK GDP is expected to recover in February and March such that output returns to its pre pandemic level once again by the end of the first quarter. The Labour Force Survey unemployment rate fell to 4.1% in the three months to November, and is expected to fall further in the near term, to 3.8% in 2022 Q1. Beyond the near term, UK GDP growth is expected to slow to subdued rates. The main reason for that is the adverse impact of higher global energy and tradable goods prices on UK real aggregate income and spending. As a result, the unemployment rate is expected to rise to 5% and excess supply builds to around 1% by the end of the forecast period. Underlying earnings growth is estimated to have remained above pre pandemic rates, and is expected to strengthen over the coming year, to around 4 %. This is consistent with the results of the Bank s Agents  annual pay survey, with the tight labour market, and with some temporary upward pressure on wage settlements from higher price inflation. Twelve month CPI inflation rose from 5.1% in November to 5.4% in December, almost 1 percentage point higher than expected at the time of the November Report. Inflation is expected to increase further in coming months, to close to 6% in February and March, before peaking at around 7 % in April. This projected peak is around 2 percentage points higher than expected in the November Report. The projected overshoot of inflation relative to the 2% target mainly reflects global energy and tradable goods prices. The further rise in energy futures prices meant that Ofgem s utility price caps were expected to be substantially higher at the reset in April 2022. Core goods CPI inflation is also expected to rise further, due to the impact of global bottlenecks on tradable goods prices. Monetary Policy Report February 2022 Monetary Policy Summary ii In the February Report central projection, upward pressures on CPI inflation are expected to dissipate over time, as global energy prices are assumed to remain constant after six months, and as global bottlenecks ease and tradable goods prices fall back a little. Underlying wage growth is also projected to ease from 2023, as the labour market loosens gradually and inflation declines. Conditioned on the rising market implied path for Bank Rate and the MPC s current forecasting convention for future energy prices, CPI inflation is projected to fall back to a little above the 2% target in two years  time and to below the target by a greater margin in three years. In an alternative scenario that is conditioned on energy prices following forward curves throughout the forecast period and as set out in the February Report, excess supply is around   percentage point lower in the medium term than in the MPC s central projection, and CPI inflation is around   percentage point below the 2% target in two and three years  time. 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 and repeated shocks. In particular, should recent movements prove persistent, the sharp rises in prices of global energy and tradable goods of which the United Kingdom is a net importer will necessarily weigh on UK real aggregate income and spending. This is something monetary policy is unable to prevent. The role of monetary policy is to ensure that, as such a real economic adjustment occurs, it does so consistent with achieving the 2% inflation target sustainably in the medium term, while minimising undesirable volatility in output. Given the current tightness of the labour market and continuing signs of greater persistence in domestic cost and price pressures, the Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting. Consistent with the MPC s guidance set out in the August 2021 Report, the Committee agrees at this meeting that the Bank of England should cease to reinvest any future maturities falling due from its stock of UK government bond purchases. This reflects the MPC s intention to reduce its holdings of government bonds in a gradual and predictable manner. In addition, the Committee agrees that the Bank of England should cease to reinvest any maturities falling due from its stock of sterling non financial investment grade corporate bond purchases, and that it should initiate a programme of corporate bond sales to be completed no earlier t