Bank of England Keeps Rates at 5.25%

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to maintain a 2% inflation target and support economic growth and employment. At their latest meeting, ending on June 19, 2024, the MPC voted to keep the Bank Rate steady at 5.25%. While most members supported this decision, two preferred a slight reduction to 5%.

Key Points:

Inflation:

• Current Status: The annual Consumer Price Index (CPI) inflation dropped to 2.0% in May, down from 3.2% in March. This aligns with the projections in the May Monetary Policy Report.
• Short-Term Expectations: Household inflation expectations have moderated. However, CPI inflation is expected to rise slightly in the latter half of the year as the significant energy price declines from last year will no longer be part of the annual comparison.

Economic Growth:

• GDP Growth: The UK’s GDP grew more strongly than anticipated during the first half of 2024. Despite this, business surveys indicate a slower underlying growth rate of approximately 0.25% per quarter.
• Sector Insights: Household consumption increased modestly, and business investment showed some strength, particularly in areas like aircraft spending. Housing investment also saw growth, partly indicating some resilience against higher interest rates.

Labour Market:

• Current Conditions: The labour market is becoming less tight but remains tighter than historical standards.
• Employment Trends: Employment growth has slowed, with a notable reduction in vacancies, yet still above pre-Covid levels. Wage growth has also eased, with private sector regular pay increasing at a slower pace.

Service Prices:

• Inflation Rate: Consumer price inflation for services was 5.7% in May, down from 6.0% in March but higher than projected. This includes regulated or indexed prices, which typically change once a year.
• Price Behavior: Businesses expect the frequency of price increases to normalize, suggesting less pressure on inflation from service costs.

Monetary Policy:

• Current Stance: The restrictive monetary policy stance is necessary to bring inflation back to the 2% target sustainably. The policy needs to remain tight for a sufficient period to ensure inflation does not become entrenched above the target.
• Future Adjustments: The MPC is prepared to adjust the policy based on economic data. They will closely monitor indicators of persistent inflationary pressures and overall economic resilience, including labour market conditions, wage growth, and service price inflation.

International Context:

Global GDP, adjusted for the UK’s economic weight, rose by 0.5% in early 2024, matching expectations. Growth rates in advanced economies, such as the US and Euro-area, have converged. In China, GDP grew by 1.6%, bolstered by strong exports. Other emerging markets, particularly India, showed healthy growth. Commodity prices saw increases, with Brent crude oil rising by 3% to around $85 per barrel and European wholesale natural gas prices increasing by 12%.

Financial Conditions:

Government bond yields in major economies showed significant co-movement, influenced by recent economic data and political events. The sterling effective exchange rate strengthened by about 2%. Growth in net lending by banks increased slightly, while mortgage approvals fell slightly after six consecutive months of growth.

Immediate Decision:

• MPC Vote: Seven MPC members, including Andrew Bailey and Sarah Breeden, voted to keep the Bank Rate at 5.25%. Two members, Swati Dhingra and Dave Ramsden, preferred a 0.25% reduction, citing a need for a smoother transition and accounting for transmission lags.
• Rationale: The restrictive stance of monetary policy is currently seen as essential to control inflation and manage economic activity. Despite the recent drop in headline inflation to the 2% target, the MPC remains cautious about persistent inflationary pressures, particularly in the services sector.

Looking Ahead:

The MPC will continue to assess economic data and adjust policy as necessary to ensure inflation sustainably returns to the 2% target. They will closely monitor labour market conditions, wage growth, and service price inflation indicators. The next detailed review and potential policy adjustments will occur as part of the August forecast round.