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

Bank of England Monetary Policy Report Monetary Policy Committee May 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/may-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: Monetary policy since the February 2024 Report 2: Current economic conditions 2.1: Global economy and financial markets 2.2: Domestic credit conditions 2.3: Domestic activity and the labour market 2.4: Wage growth and inflation 2.5: Inflation expectations Box B: Assessing developments in broad money Box C: Recent developments in the market sector Box D: Uncertainties around Labour Force Survey data Box E: Agents  update on business conditions 3: In focus   Developments in the persistence of UK inflation 3.1: Why is inflation persistence important? 3.2: The effects of external supply shocks on inflation 3.3: The persistence of domestic inflationary pressure 3.4: The MPC s forecast for inflation Annex: Other forecasters  expectations Glossary and other information 4 6 8 9 22 24 26 33 35 45 47 49 55 58 62 66 66 67 71 82 83 85 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 8 May 2024, the MPC voted by a majority of 7 2 to maintain Bank Rate at 5.25%. Two members 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 May Monetary Policy Report and are conditioned on a market-implied path for Bank Rate that declines from 5 % to 3 % by the end of the forecast period, compared with an endpoint of 3 % in February. Internationally, recent growth outturns have tended to be stronger in the United States than in the euro area. Underlying inflationary pressures in both regions have continued to moderate somewhat since the start of the year, though by less than expected in the United States. Forward interest rates have risen in the United States and, as a result, elsewhere. Following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2. Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period. A margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter, in part reflecting the continued restrictive stance of monetary policy. With respect to indicators of inflation persistence, services consumer price inflation has declined but remains elevated, at 6.0% in March. There remains considerable uncertainty around statistics derived from the ONS Labour Force Survey. It is therefore more difficult to gauge the evolution of the labour market. Based on a broad set of indicators, the MPC judges that the labour market continues to loosen but that it remains relatively tight by historical standards. Annual private sector regular average weekly earnings growth declined to 6.0% in the three months to February, although that series tends to be volatile. Alternative indicators also suggest easing pay growth. Twelve-month CPI inflation fell to 3.2% in March from 3.4% in February. CPI inflation is expected to return to close to the 2% target in the near term, but to increase slightly in the second half of this year, to around 2 %, owing to the unwinding of energy-related base effects. There continue to be upside risks to the near-term inflation outlook from geopolitical factors, although developments in the Middle East have had a limited impact on oil prices so far. Conditioned on market interest rates and reflecting a margin of slack in the economy, CPI inflation is projected to be 1.9% in two years  time and 1.6% in three years in the May Report. 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. Page 4Bank of England At this meeting, the Committee voted to maintain Bank Rate at 5.25%. Headline CPI inflation has continued to fall back, in part owing to base effects and external effects from goods prices. The restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labour market and is bearing down on inflationary pressures. Key indicators of inflation persistence are moderating broadly as expected, although they remain elevated. 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. The Committee will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding. 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 it declined to 3 % in 2024 Q1, broadly in line with expectations in the February Report. Inflation is projected to return to close to the target throughout the second quarter of this year, before increasing slightly in Q3 and Q4, to around 2 %. This pickup is driven by energy price inflation, which is projected to become less negative during Q3 and Q4 compared with Q2 (Chart 1.1). CPI inflation excluding energy has fallen by less than headline inflation over recent quarters and is projected to be around 3% during the second half of the year, owing to the persistence of domestic inflationary pressures. Services CPI inflation is expected to continue to ease gradually from 6.0% in March, while private-sector regular pay growth is expected to slow to around 5% during the rest of this year. The Committee expects second-round effects in domestic prices and wages to take longer to unwind than they did to emerge (Key judgement 3). The best collective judgement of the Committee is that these second-round effects are likely to fade slightly faster than assumed previously, pushing down on the latest CPI inflation projection during the third year of the forecast period. Conditioned on market interest rates and reflecting a margin of slack in the economy, CPI inflation is projected to be 1.9% in two years  time and 1.6% in three years. There continue to be upside risks to the modal CPI inflation projection from geopolitical factors during the first half of the forecast period, but the risks overall are more evenly balanced over the second half. Following modest weakness last year, four-quarter GDP growth is expected to pick up durin