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

Bank of England Monetary Policy Report Monetary Policy Committee May 2025 Bank of England Page 1 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/may-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: Alternative scenarios prepared by Bank staff for the evolution of the economy Box B: Monetary policy since the February 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 4 6 8 10 25 33 34 36 44 47 53 58 Box C: Implications of developments in global trade policy for the UK economy 74 Box D: Assessing recent developments in broad money Box E: Agents  update on business conditions Annex: Other forecasters  expectations Glossary and other information 82 87 92 94 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 7 May 2025, the MPC voted by a majority of 5 4 to reduce Bank Rate by 0.25 percentage points, to 4.25%. Two members preferred to reduce Bank Rate by 0.5 percentage points, to 4%. Two members preferred to maintain Bank Rate at 4.5%. There has been substantial progress on disinflation over the past two years, as previous external shocks have receded, and as the restrictive stance of monetary policy has curbed second-round effects and stabilised longer-term inflation expectations. That progress has allowed the MPC to withdraw gradually some degree of policy restraint, while maintaining Bank Rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures. Underlying UK GDP growth is judged to have slowed since the middle of 2024, and the labour market has continued to loosen. Progress on disinflation in domestic price and wage pressures is generally continuing. Twelve-month CPI inflation fell to 2.6% in March from 2.8% in February, close to expectations in the February Report. Although indicators of pay growth remain elevated, a significant slowing is still expected over the rest of the year. Wholesale energy prices have fallen back since the February Report. Previous increases in energy prices are still likely to drive up CPI inflation from April onwards, to 3.5% for 2025 Q3. Inflation is expected to fall back thereafter. Measures of household inflation expectations have risen recently. Uncertainty surrounding global trade policies has intensified since the imposition of tariffs by the United States and the measures taken in response by some of its trading partners. There has subsequently been volatility in financial markets, and market-implied policy rates have moved lower. Prospects for global growth have weakened as a result of this uncertainty and new tariff announcements, although the negative impacts on UK growth and inflation are likely to be smaller. The Committee remains focused on returning CPI inflation sustainably to target in the medium term. In deciding the appropriate degree and pace of monetary policy adjustments required to achieve this, the Committee has considered a range of possibilities for how domestic inflationary pressures could evolve, as well as the broader circumstances that could necessitate varying the course of policy. Bank of England Page 4 The May Report sets out two illustrative scenarios. In one scenario, there could be weaker supply and more persistence in domestic wages and prices, including from second-round effects related to the near-term increase in CPI inflation. In another scenario, inflationary pressures could ease more quickly owing to greater or longer-lasting weakness in demand relative to supply, in part reflecting uncertainties globally and domestically. Monetary policy is not on a pre-set path. The Committee will remain sensitive to heightened unpredictability in the economic environment and will continue to update its assessment of risks. At this meeting, the Committee voted to reduce Bank Rate to 4.25%, reflecting continued progress in disinflation though with risks to inflation remaining in both directions. Based on the Committee s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate. The Committee will continue to monitor closely the risks of inflation persistence and what the evidence may reveal about the balance between aggregate supply and demand in the economy. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further. The Committee will decide the appropriate degree of monetary policy restrictiveness at each meeting. Bank of England Page 5 1: The economic outlook Progress on disinflation in domestic price and wage pressures is generally continuing (Key judgement 1). CPI inflation averaged 2.8% in 2025 Q1, above target but close to expectations at the time of the February Report. CPI inflation excluding energy has remained around 3 % over recent quarters, compared with its peak of nearly 8 % in mid-2023 (Chart 1.1). Headline CPI inflation is still expected to rise temporarily in the near term, to 3.5% in 2025 Q3, in large part reflecting developments in household energy bills and, to a lesser degree, regulated prices. A small margin of excess supply has opened up in the UK economy. This is expected to widen over the next couple of years, to just under 1% of potential GDP (Key judgement 2). That in large part reflects a tightening in the stance of fiscal policy and the continuing restrictive stance of monetary policy. Relative to the February Report projection, there is expected to be a slightly greater margin of excess supply throughout most of the forecast period, in part reflecting global trade developments. Conditioned on the market path of interest rates, the building margin of excess supply in the economy acts against some continuing second-round effects 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 May CPI projection is broadly similar to the profile in February, albeit slightly lower. In the medium term, that reflects the downward pressure on inflation from a slightly wider margin of slack and a weaker contribution from import price pass-through, in turn owing to the impact of global trade developments and the appreciation of the sterling exchange rate. The imposition of tariffs and the heightened uncertainty about trade policies has introduced a new source of risk for the global economy. What matters for UK monetary policy is the overall impact of these developments on the outlook for CPI inflation in the medium term. In the baseline forecast, based on current policies, new tariffs and the elevated level of trade policy uncertainty weigh on global activity. World export prices are expected to be materially weaker, particularly in China (Key judgement 4). The current overall impact of trade developments on the UK is therefore more likely to be disinflationary than inflationary. Consistent with this, the effects incorporated into the baseline are negative, though not larg