Bank of England — Monetary Policy Report (UK, 2025)

Bank of England Monetary Policy Report Monetary Policy Committee August 2025 Bank of England 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/2025/august-2025.   Bank of England 2025 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 baseline projections 1.2: Key judgements and risks Box A: Assessing the restrictiveness of the monetary policy stance Box B: Reviewing the process of quantitative tightening Box C: Monetary policy since the May 2025 Report 2: Current economic conditions 2.1: Global economy and financial markets 2.2: Domestic credit conditions 2.3: Domestic activity 2.4: The labour market and supply 2.5: Wages and inflation Box D: Global uncertainties and their implications for the UK economy Box E: The outlook for food price inflation Box F: Agents  update on business conditions Annex: Other forecasters  expectations Glossary and other information 4 6 8 10 24 35 43 44 46 52 55 60 67 79 89 96 102 104 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 August 2025, the MPC voted by a majority of 5 4 to reduce Bank Rate by 0.25 percentage points, to 4%, rather than maintaining it at 4.25%. There has been substantial disinflation over the past two and a half years, following previous external shocks, supported by the restrictive stance of monetary policy. That progress has allowed for reductions in Bank Rate over the past year. The Committee remains focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2% target in the medium term. The path of disinflation in underlying domestic price and wage pressures has generally continued, albeit to different degrees. Twelve-month CPI inflation increased to 3.5% in 2025 Q2, owing to developments in energy, food and administered prices. Pay growth remains elevated, but has declined further recently, and is still expected to slow significantly over the rest of the year. Services consumer price inflation has been broadly flat over recent months. The Committee continues to be vigilant about the extent to which easing pay pressures will feed through to consumer price inflation. CPI inflation is forecast to increase slightly further to peak at 4.0% in September. Inflation is expected to fall back thereafter towards the 2% target, although the Committee remains alert to the risk that this temporary increase in inflation could put additional upward pressure on the wage and price-setting process. Overall, the MPC judges that the upside risks around medium-term inflationary pressures have moved slightly higher since May. Underlying UK GDP growth has remained subdued, consistent with a continued, gradual loosening in the labour market. A margin of slack is judged to have emerged in the economy. Downside domestic and geopolitical risks around economic activity remain, although trade policy uncertainty has diminished somewhat. At this meeting, the Committee voted to reduce Bank Rate to 4%. A gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate. The restrictiveness of monetary policy has fallen as Bank Rate has been reduced. The timing and Bank of England Page 4 pace of future reductions in the restrictiveness of policy will depend on the extent to which underlying disinflationary pressures continue to ease. Monetary policy is not on a pre-set path, and the Committee will remain responsive to the accumulation of evidence. Bank of England Page 5 1: The economic outlook The path of disinflation in underlying domestic price and wage pressures has generally continued, albeit to different degrees (Key judgement 1). Wage growth has declined further recently, to around 5% in May, although services consumer price inflation has remained at 4.7% in recent months. Twelve-month CPI inflation averaged 3.5% in 2025 Q2, 0.1 percentage points higher than expected in the May Report and an increase from 2.8% in Q1. Around half of this rise was accounted for by an expected reduction in the extent to which energy prices have been dragging on headline inflation. The contribution of administered prices to inflation has increased, while food price inflation has also picked up by more than anticipated. While headline inflation is projected to rise slightly further in the near term, to around 3 % over the second half of this year, the baseline projection assumes that this will not lead to additional second-round effects on domestic inflationary pressures. Four-quarter GDP growth is projected to remain close to its recent average level, of around 1 %, before picking up in the second half of the forecast period. This remains dependent on a sustained fall in the household saving ratio. A margin of spare capacity is estimated to have opened up in the UK economy and the labour market is continuing to loosen gradually. This margin of excess supply is expected to build a little further, before narrowing from the end of next year onwards (Key judgement 2). A range of factors are expected to reduce spare capacity further out, including the impact on demand of the gradual loosening in the stance of monetary policy embodied in the market path of interest rates. Monetary policy still weighs on the level of demand across the forecast period, however, such that it continues to contribute to the disinflationary process. The margin of spare capacity in the economy is expected to act against some continuing persistence in domestic prices and wages in order for CPI inflation to fall back to around the 2% target in the medium term (Key judgement 3). The August CPI projection is somewhat higher than the profile in May during the first and second years of the forecast period, and broadly similar in the medium term. There remains considerable uncertainty around the calibration of the Committee s judgement on the path of second-round effects in domestic prices and wages. Overall, the MPC judges that the upside risks around medium-term inflationary pressures have moved slightly Bank of England Page 6 higher since May. This is in part due to the risk of inflation expectations impacting price-setting as illustrated in the inflation persistence scenario set out in the May Report. Table 1.A: Baseline forecast summary (a) (b) GDP (c) CPI inflation (d) 2025 Q3 2026 Q3 2027 Q3 2028 Q3 1.2 (1.1) 1.3 (1.3) 1.5 (1.6) 1.7 3.8 (3.5) 2.7 (2.4) 2 (1.9) Unemployment rate (e) 4.8 (4.6) 4.9 (4.9) 4.8 (5) Excess supply/Excess demand (f) -  (- ) -  (- ) -  (- ) 2 4.8 0 Bank Rate (g) 4.1 (4) 3.5 (3.5) 3.6 (3.6) 3.7 (a) Figures in parentheses show the corresponding projections in the May 2025 Monetary Policy Report. (b) The numbers shown in this table are conditioned on the assumptions described in Section 1.1. (c) Four-quarter growth in real GDP. (d) Four-quarter inflation rate. (e) International Labour Organization (ILO) definition of unemployment. Although LFS unemployment data have been reinstated by the ONS, they are badged as official statistics in development and the LFS continues to suffer from very low response rates, which can introduce volatility and potentially non-response bias (Box D of the May 2024 Monetary Policy Report). (f) Per cent of potential GDP. A negative figure implies output is below potential an