August 3, 2023
The Bank of England’s Monetary Policy Committee (MPC) at its August 2, 2023 meeting voted to increase Bank Rate by 0.25 percentage points, to 5.25%, as opposed to maintaining the Bank Rate at 5.0%, or increasing to 5.5%.
The MPC observes that the second-round effects in domestic price and wage developments generated by external cost shocks are likely to take longer to unwind than they did to emerge. Additionally, the labour market remained robust, however, signs of it loosening was observed. Consequently, The MPC sets monetary policy in line with its remit to meet the 2% inflation target sustainably in the medium term, to aid in supporting growth and employment.
It was noted at the MPC meeting and August Monetary Policy Report, the market-implied path for Bank Rate peaked just over 6% but averaged under 5.5% over the next three years. This is comparable to a 4% average for the May report over the same period. Also, the sterling effective exchange rate has appreciated 4% relative to the May report.
The MPC highlighted, “Underlying quarterly GDP growth has been around 0.2% during the middle of this year. Bank staff expect a similar growth rate in the near term, Indicating stronger household income and retail sales volume. LFS unemployment increased to 4% in the three months to May, higher than expected at the time of the May Report, while the vacancies-to-unemployment ratio continues to fall but remains significantly elevated.”
The CPI for the twelve-months fell to lower than anticipated levels by the MPC, to 7.9% in June from 8.7% May. Furthermore, “CPI inflation is expected to fall significantly further, to around 5% by the end of the year, reflecting lower energy prices, and to a lesser degree, food and core goods price inflation. Services CPI inflation is projected to remain broadly unchanged in the near term.
The UK monetary policy framework recognizes that there will be occasions when inflation will depart from the target resulting from shocks and disturbances. The Committee indicated that they would continue to closely monitor indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. Nonetheless, The MPC will continue to tighten the monetary policy in light of persistent pressures to the economic outlook, thus maintaining restrictive bank rates to ensure that the 2% inflationary target is met.
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