Bank of England holds bank rate steady at 5.25%

The MPC's updated projections, outlined in the November Monetary Policy Report, hinge on a market-implied path for bank rate that holds steady around 5.25 per cent until the third quarter of 2024, before tapering to 4.25 per cent by the end of 2026. This trajectory marks a downward revision from projections set in August, the MPC said in a press release.

Recent economic developments have seen long-term government bond yields rise across advanced economies, with stronger-than-expected GDP growth in the United States. However, inflationary pressures remain elevated, exacerbated by geopolitical tensions in the Middle East impacting oil markets.

The UK’s GDP trajectory has been lacklustre, with projections indicating flat growth in Q3 of 2023 and only a marginal 0.1 per cent increase in Q4. Labour market indicators present a mixed picture, with employment growth softening and signs of a loosening labour market.

Despite high pay growth across various metrics, inconsistencies in data series present challenges in forecasting near-term wage trends. However, wage growth is expected to decelerate in the coming quarters.

CPI inflation, which stood at 6.7 per cent in September and Q3 of 2023, has fallen short of previous estimates. The MPC anticipates a sharp fall in CPI inflation, projecting a decrease to 4.75 per cent in Q4 of 2023 and further to 3.75 per cent in Q2 of 2024.

The MPC’s modal projection, based on the market-implied path for bank rate, indicates that CPI inflation will realign with the 2 per cent target by the end of 2025, dipping below thereafter. This reversion is expected as economic slack mitigates domestic inflationary pressures. However, the Committee acknowledges that inflation risks are tilted to the upside, particularly given the potential for prolonged domestic price and wage increases and volatility in energy prices stemming from Middle East tensions, the release added.

Emphasising the primacy of price stability, the MPC reaffirms its commitment to ensuring that CPI inflation returns sustainably to the 2 per cent target in the medium term, in accordance with its remit. The Committee recognises the influence of the tightened monetary policy on labour markets and economic momentum. Acknowledging the restrictiveness of the current policy stance, the Committee voted to maintain the bank rate at 5.25 per cent.

In the face of ongoing inflationary pressures and economic resilience, the MPC commits to continued monitoring and indicates that a restrictive monetary policy may be necessary for an extended period.

ALCHEMPro News Desk (KD)