The Bank of England (BoE) announced on Thursday its Monetary Policy Committee (MPC) voted by a majority of 7-2 to remain the bank rate unchanged at 5.25 per cent at its May meeting. Meanwhile, two MPC members preferred to cut the bank rate by 25 basis points. Investors expected that only one MPC member would support an interest rate cut.
In its policy statement, the BoE notes:
Following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2.
Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period.
A margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter, in part reflecting the continued restrictive stance of monetary policy.
Services consumer price inflation has declined but remains elevated, at 6.0% in March.
There remains considerable uncertainty around statistics derived from the ONS Labour Force Survey. It is therefore more difficult to gauge the evolution of the labor market.
Based on a broad set of indicators, the MPC judges that the labor market continues to loosen but that it remains relatively tight by historical standards.
Twelve-month CPI inflation fell to 3.2% in March from 3.4% in February.
CPI inflation is expected to return to close to the 2% target in the near term, but to increase slightly in the second half of this year, to around 2.5%, owing to the unwinding of energy-related base effects.
There continue to be upside risks to the near-term inflation outlook from geopolitical factors, although developments in the Middle East have had a limited impact on oil prices so far.
Conditioned on market interest rates and reflecting a margin of slack in the economy, CPI inflation is projected to be 1.9% in two years’ time and 1.6% in three years.
Monetary policy will ensure that CPI inflation returns to the 2% target sustainably in the medium term.
Headline CPI inflation has continued to fall back, in part owing to base effects and external effects from goods prices.
The restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labor market and is bearing down on inflationary pressures.
Key indicators of inflation persistence are moderating broadly as expected, although they remain elevated.
Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit.
The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably.
The Committee will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding.