Bank of England Maintains Rate; Slashes Bond Purchases
- Bank Rate held at 5.25% with a 5–4 vote.
- UK bond purchases reduced by £100 billion.
- CPI inflation drops; service inflation remains high.
Bank of England’s Monetary Policy Decision
In a narrow decision, the Bank of England’s Monetary Policy Committee (MPC) opted to maintain the Bank Rate at 5.25%, with a vote split of 5–4. However, a unanimous vote emerged on the decision to decrease the stockpile of UK government bond purchases by £100 billion over the next year, bringing it to a total of £658 billion.
The Committee’s projections from August anticipated a return to the 2% inflation target by Q2 2025. These expectations were rooted in diminishing inflationary pressures both domestically and externally. Despite this, the risks surrounding inflation remained tilted to the upside, due to potential lingering impacts of external cost shocks on wages and prices.
Recent developments depict a mixed economic picture: global growth remains consistent with August’s projections, but regional differences persist. The UK GDP reduced by 0.5% in July, with indicators suggesting a mere marginal increase for Q3 2023. The job market has shown slight relaxation, yet remains historically stringent, highlighted by an unemployment rate of 4.3% up to July. Notably, the Average Weekly Earnings growth reached 8.1% in the three months leading to July, a rate higher than other pay growth indicators.
CPI inflation recently decreased from 7.9% in June to 6.7% in August, underperforming expectations and prompting a correspondence exchange between the Governor and the Chancellor of the Exchequer. This drop in inflation is largely attributed to diminished inflation in energy, food, and core goods prices. Conversely, service price inflation is predicted to remain high in the immediate future.
Acknowledging the primary importance of price stability, the MPC remains dedicated to the 2% inflation target, ensuring that deviations from the target are temporary and manageable. The current monetary stance is viewed as restrictive, considering the marked increase in Bank Rate since the onset of the tightening cycle. The Committee underscores its vigilance towards potential persistent inflationary pressures and the resilience of the overall economy. If these pressures prove to be long-lasting, further monetary tightening could be on the horizon.
Recalling its pledge from August 2022, the MPC will yearly evaluate the reduction in the Asset Purchase Facility. Accordingly, the Committee’s current decision aligns with this commitment by reducing UK government bond purchases over the subsequent year.