Monetary Policy Briefing, May 2023 The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to achieve the 2% inflation target and in a way that helps sustain growth and employment. The MPC decided by a 7:2 majority at the meeting, which ended on May 10, 2023, to increase the bank rate by 0.25 percentage points to 4.5 percent. Two members wanted to keep the bank interest rate at 4.25 percent. The Committee’s updated performance and inflation forecasts are presented in the attached May Monetary Policy Report. These are subject to market-based bank rates reaching around 4¾% in the final quarter of 2023, before ending the forecast period at just above 3.5%. There was some positive news on the near-term outlook for global activity, with UK-weighted global GDP now expected to grow moderately over the forecast period. Risks remain, but without a further shock, the tightening of lending conditions associated with recent developments in the global banking sector is likely to have only a modest impact on GDP. Headline inflation has eased in the US and the Eurozone, although core inflation remains high. UK GDP is expected to be flat in the first half of this year, although core output is expected to grow modestly, excluding the impact of strikes and extra bank holidays. Economic activity was weaker than expected in February, and the committee believes that the demand trajectory is likely to be significantly stronger than expected in the February report, although historically still modest. The improved outlook reflects stronger global growth, lower energy prices, fiscal support from the spring budget and the possibility that a tight labor market will reduce cautious household saving. Although there are signs that the labor market has begun to ease, it is expected to remain tighter in the near term than in the February report. The unemployment rate is currently projected to remain below 4 percent until the end of 2024, before rising to around 4.5 percent in the second half of the forecast period. Consumer price inflation was 10.2% in the first quarter of 2023, higher than expected at MPC meetings in February and March, with the accelerating surprise focused on core and food items. While nominal wage growth in the private sector and consumer price inflation for services remain high, they were close to expectations. Consumer price inflation is expected to slow sharply from April, in part because the large increases in the price level a year ago are declining year over year. In addition, the expansion of the spring energy price guarantee budget and the drop in wholesale energy prices will reduce the share of household electricity bills in consumer price inflation. However, food price inflation is decelerating more slowly than expected. This, along with other commodity price news, explains why the Committee’s modal consumer inflation expectation is now declining more slowly than in the February report. The MPC’s latest modal forecast, based on market rates, sees CPI inflation falling to just above 1% over two and three years, well below the 2% target. This reflects increasing economic slack and diminishing external pressures, which are expected to reduce consumer price inflation. However, there remains considerable uncertainty about how quickly consumer price inflation will sustainably return to the 2 percent target. In addition, the Committee estimates that the risks surrounding the inflation forecast are significantly tilted to the upside, reflecting the possibility that secondary wage and home price inflationary effects of external expenditure shocks may take longer to moderate than appears. The average CPI inflation profile, which incorporates this risk, is at or below the 2% target over the medium term. The MPC’s mandate is clear that inflation targeting will always apply, reflecting the primacy of price stability in the UK’s monetary policy framework. The framework recognizes that inflation sometimes deviates from the target due to shocks and disturbances. The economy experienced several very large and overlapping shocks. Monetary policy will ensure that consumer price inflation returns sustainably to the 2 percent target over the medium term if the adjustment to these shocks continues. Monetary policy also aims to ensure that long-term inflation expectations are anchored to the 2 percent target. At this meeting, the committee voted to raise the bank rate by 0.25 percentage points to 4.5 percent. At the same time, the MPC continues to risk the strengthening of domestic price and wage regulation, which is represented by an upward shift in the distribution of the projected consumer price index. How quickly domestic inflationary pressures ease will depend on economic developments, including the significant increase in bank interest rates so far. Uncertainty about the global financial and economic outlook remains high. The MPC continues to closely monitor signs of continued inflationary pressures, including labor market pressures and wage growth and service price inflation. If there were evidence of continued pressures, monetary policy would have to be tightened further. According to its mandate, the MPC will adjust the Bank Rate as needed to bring inflation sustainably to the 2 percent target over the medium term.
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