The MPC sets monetary policy to meet the 2% inflation target and in a way that helps support growth and employment. The MPC adopts a medium-term and forward-looking approach to determine the monetary position required to achieve the inflation target in a sustainable manner.
At its meeting that ended on November 6, 2024, the Monetary Policy Committee voted 8-1 to cut the bank interest rate by 0.25 percentage points, to 4.75%. One member preferred to keep the bank interest rate at 5%.
There has been continued progress in reducing inflation.
especially as previous external shocks have subsided, although remaining domestic inflationary pressures are fading more slowly.
Consumer price inflation fell to 1.7% in September but is expected to rise to around 2.5% by the end of the year as weak energy prices exit the annual comparison. Consumer price inflation in the services sector fell to 4.9%. Growth in the private sector’s annual regular weekly average income continued to decline but remained high at 4.8% in the three months to August. Headline GDP growth is expected to slow to its last baseline pace of around 1/4% per quarter in the second half of this year. The MPC believes that the labour market continues to slacken, although it appears relatively tight by historical standards.
Monetary policy was guided by the need to squeeze the remaining inflationary pressures from the economy to achieve the 2% target in a timely and permanent manner. The deliberations of the Committee supported the consideration of a range of situations that might affect the evolution of persistent inflation.
Monetary policy will need to be held tight long enough for the risks to a sustainable return of inflation to the 2% target in the medium term dissipate.
Inflation and economic growth expected after the official exchange rate of the pound sterling at banks was lowered
Most of the persistence of residual inflation may dissipate rapidly as wage and price-setting dynamics continue to return to normal after the global shocks that pushed inflation up subsided. In the second case, a period of economic recession may be needed to fully normalize these dynamics. In the third case, some persistent inflation may also reflect structural shifts in wage behavior and price setting. Each of these cases has different implications for how quickly monetary policy restrictions are withdrawn.
The MPC’s latest forecast for activity and inflation was also presented in the accompanying November report. This expectation is based on the second case. CPI inflation is expected to ease to around 2% medium-term target, subject to the usual 15-day average forward interest rate.
with a margin of inaction later in the forecast period that works against secondary effects on domestic prices and wages.
The combined effects of the measures announced in the autumn 2024 budget are tentatively expected to boost the GDP level by about 3/4% at its peak within a year.
compared to the August forecast. The budget is tentatively expected to boost CPI inflation by about 1/2 percentage point at the peak.
reflecting both the spillover effects of smaller oversupply margin and the direct effects from budget measures.
There is still a great deal of uncertainty about the labor market prospects. The data is hard to interpret, and wage growth has been higher than usual relationships might expect. The impact of budget announcements on inflation will depend on how quickly and quickly these high costs move to prices.
profit margins, wages, and employment. At this meeting, the committee voted to cut the bank interest rate to 4.75%, reflecting continued progress in reducing inflation.
What factors affect changes in the official interest rate of the GBP?
Several key factors affect changes in the official interest rate of the pound sterling set by the Bank of England:
Inflation: The Bank of England’s primary goal is to keep prices stable, typically targeting an inflation rate of around 2%. If inflation rises significantly above this target, the bank may increase the rate to calm the economy.
Economic growth: The overall performance of the UK economy, including GDP growth rates, can influence interest rate decisions. Strong economic growth may cause higher prices to prevent overheating, while weak growth may lower interest rates.
Employment levels: Higher employment rates and wage growth can contribute to inflationary pressures, influencing the bank to raise interest rates. Conversely, higher unemployment rates may lead to lower interest rates to stimulate job creation.
Consumer confidence: Changes in consumer sentiment can affect spending and investment.
affecting economic growth and inflation, and thus influencing price decisions.
Global Economic Conditions: International economic developments.
including trade dynamics, geopolitical events and economic performance in major trading partners, can affect the UK economy and therefore the bank interest rate.
Financial Market Stability: The stability of financial markets and institutions is crucial. If there are signs of instability, the bank may adjust prices to ensure liquidity and confidence in the financial system.
Exchange rates: Movements in the value of the pound sterling can affect import and export prices.
affecting inflation and economic conditions.
which in turn can affect the bank interest rate.
Government fiscal policy: Fiscal policies, including government spending and taxes, can affect economic activity and inflation.
subsequently influencing the bank’s interest rate decisions.
These factors are interrelated, and the Bank of England takes into account a range of economic indicators and forecasts when making decisions about the official bank interest rate.
