Bank of England Interest-Rate Decision

Inflation has been close to our 2% target for more than half a year now, and today we have been able to cut bank rate again by 0.25 percentage points to 4.75%. The best and most sustainable contribution that monetary policy can make to growth and prosperity is to ensure low and stable inflation. I'll start my remarks on recent developments and the near-term outlook for inflation, then turn to our medium-term forecast and its determinant drivers, before concluding on today's monetary policy decision. Chart one, let's just come up, shows the evolution of 12-month consumer price inflation, that's the purple line, over the past year. It's fallen a long way to an average of 2% over the past five months and 1.7% in the latest data, which were for September. This is 0.4 percentage points below our August projection, which is shown in orange, and around one and a half percentage points below our projection from a year ago, which is the blue line. So the disinflationary progress process has progressed well and indeed faster than we expected. Both oil and gas prices have been significantly lower than market pricing suggested a year ago, but the downside news on inflation over the year has also reflected lower than expected food, core goods, and services price inflation. Since August, services inflation has fallen quite sharply to 4.9% in September, 0.6 percentage points below the projection we made in August. Looking further ahead to the next six months, which is shown in the shaded area of chart two that's just come up, we expect consumer price inflation to rise somewhat as the drag from lower energy bills wanes, that's the orange bars, and the contribution of services price inflation comes to dominate, that's the yellow bars. It's encouraging that we can now move forward from a lower starting point, but services price inflation remains elevated and recent downside news has tended to be driven by more volatile components such as airfares and accommodation. We still need to see services price inflation come down more broadly to keep headline consumer price inflation at the 2% target. Monetary policy has been guided by the need to squeeze remaining inflationary pressures out of the economy to achieve the 2% target sustainably. We have needed restrictive monetary policy to lean against domestic second-round effects from those global inflationary shocks. We now face the question of whether the remaining domestic inflationary pressure, for instance manifest in services price inflation and pay growth, will dissipate naturally now that the global shocks initially driving up inflation have unwound, or whether achieving this disinflation will require a period of economic slack in the UK economy. Alternatively, are we experiencing sustained changes in the structure of the economy with longer-lasting effects on inflationary pressures? These have become important cases in the MPC's deliberations. As policymakers, we can think that all three cases are of relevance, albeit to different degrees. Now, the forecast that we published in the Monetary Policy Report today is based on the second case. In the projection, second-round effects on domestic prices and wages are expected to take somewhat longer to unwind than they did to emerge, but a margin of slack emerging over the forecast period is sufficient to ensure that consumer price inflation falls back to the 2% target in the medium term. Now, this is shown in chart three. The blue line is the projection for consumer price inflation conditional on the 15-day average of the market-implied path for interest rates to the 29th of October, that's our usual convention. Headline inflation increases to around 2.75% by the second half of next year before falling back to around the 2% target over the medium term. Alongside the forecast, the committee has also considered the two alternative cases for how the persistence of inflationary pressures may evolve. In these cases, inflationary pressures may prove to be either less persistent or more persistent than in the projection. And this is set out in more detail in a box in the report. I'm now going to add some reflections on the key judgments that we've made on the outlook for inflation. Our November projection is conditioned on government policies as announced in the autumn budget. Chart four shows public sector net borrowing and how it is projected to change relative to the previous March projection by the Office for Budget Responsibility. In the autumn budget, the path for public sector net borrowing is higher than it was in March, but the chart on the left also shows that the difference is more pronounced in the first than in the future years. Public sector net borrowing is still projected to fall significantly over the forecast period. We provisionally expect the measures announced in the budget to boost the level of GDP by around three-quarters of a percent at their peak in a year's time. This reflects the stronger and relatively front-loaded paths for government consumption and investment, more than offsetting the impact on growth of higher taxes. Overall, fiscal policy is still expected to tighten over the forecast, but all else equal, the changes announced in the budget are expected to reduce the margin of spare capacity in the economy over the forecast period. The marginal effects on our inflation projections from the autumn budget is shown in chart five that's just come up. Combined measures push up on inflation by just under half a percentage point at their peak, that's the white line. The extended freeze on fuel duty pushes down on inflation over the next fiscal year, that's the orange bars, but as it is assumed to rise thereafter in line with announced government policy, fuel duty then pushes up on inflation from the second quarter of 2026. Other measures directly push up on inflation over the first year, that's the purple bars. Now, there are different ways in which the increase in employer National Insurance contributions could play out in the economy. It represents an increase in the cost of employment. There are at least four margins of adjustment. Firms could pass on higher costs to consumer prices, or firms could absorb the increase through lower margins or higher productivity. Firms could increase wages by less, or firms could respond by reducing employment. Now, let me be clear, public policy measures of this kind serve other objectives and it's not for us to opine one way or the other. What we must do is respond to any consequences for inflation in order to meet our 2% target over the medium term. Now, we will get information on how the consequences for inflation evolve over time. A gradual approach to removing monetary policy restraint will help us to observe how this plays out along with other risks to the inflation outlook. Developments in the UK labor market continue to be very important for assessing developments in inflationary pressures. There are mixed signals from the data. Wage growth remains strong relative to our models, perhaps reflecting some continuing real wage catch-up in a still relatively tight labor market. As chart six shows, annual growth in private sector regular pay, that's in blue on the left-hand side, has eased to 4.8% in the three months to August, down from a peak of just above 8% in mid-2023, and indeed in line with our expectations in August. A normalization in inflation expectations and easing in labor market tightness have supported that moderation in pay growth. Consistent with the slowing in the official measure, a bank staff indicator model of underlying pay growth has also declined in recent quarters, pointing to underlying wage growth of around 4.8%, that's the orange line. Along with some, but not all, outside surveys and measures seen on the right, this points to a gradual but progressive move down in wage growth towards levels consistent with the 2% inflation target. The bank's agents also suggest that wage settlements could continue to come down, perhaps to around 3 to 4% next year, compared with 6 to 6.5% in 2023. And I would add that this is the story that I've heard consistently when I've joined them recently on visits to businesses in different parts of the country. But two further observations should give us cause to reflect. First, one-year-ahead expectations for wage growth of firms in the bank's Decision Maker Panel seem to have stabilized at a higher level of around 4% in recent months. Second, the evidence, such as it is, points to the quantity side of the labor market remaining relatively tight while showing some loosening. Both of these observations could point to lingering persistence in wage pressures beyond what we're assuming in the projection. So let me conclude. There's been continued progress in disinflation, particularly as previous external shocks have abated. So at this meeting, the committee voted to reduce bank rate to 4.75%. Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further. The committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting. And with that, Claire, Dave, and I will be happy to take your questions.

Well, let me begin by echoing what Katie just said, if you don't mind, Larry, on a personal note. I know this is your last, I don't know how many of these you've done, but it must be a lot.

No, that can't be true. There's no such thing as too many of these. But look, Larry, I think we all want to join to answer the question together and A, thank you for all you've done for British economic journalism, and B, wish you all the best for the future. It's been a pleasure working with you.

So on the question about the budget, we've set out the picture. I would say, look, we've cut interest rates today, so I mean that of course is actually obviously significant in the context of the news. You'll see that the view we've reached, so the first thing I'll say, yes, there is some upward effect on inflation, but the path of inflation as we've set out, we think, you know, returns to the target in the horizon that we look at. And that is what has, you know, given us, in a sense, support for cutting rates today. But what I would say, and I just re-emphasize what I said earlier, is that there's obviously a lot that we will learn about the effects of the budget as they pass through. I think it's important that, you know, we have time to do that. We will have time to do that. And so that underlines again the message we've given today. We'll need to see how these effects pass through. You know, you saw I laid out quite carefully the channels through which the impact, for instance, of employer costs can work. They are obviously quite different channels. Actually, we can have combinations of those. We no doubt will have combinations of those channels. And we want to observe very closely how that works. Our agents are fully primed to go out and start asking about it and, you know, we'll want to get that information.

Well, I think on mortgage rates, we've actually, you know, we've seen some reduction in mortgage rates since the August report. Obviously, we've cut rates today, so we'll see how that feeds through. But obviously, how it feeds through for most mortgages now depends on how the curve moves, because most mortgages obviously price off the swap curve because they're mostly fixed-rate mortgages. So I don't, you know, I don't think that it's sensible to conclude that the path of interest rates will be particularly different in that respect. And of course, we don't, let's be very clear, we don't set out an end path ourselves, because we respond to the news as we see it and form our views as we see it. So I would, you know, I would emphasize the points I made that the profile that we have of inflation starts lower, does go up, but, you know, let's be clear, when we talk about going up, I mean these are, you know, a different order of magnitude of numbers compared to what we've, you know, been talking about in press conferences here for recent years. And it's an altogether better magnitude in that sense. But then the key point is that it comes back down to target, you know, we think sustainably within the forecast period. So that's, just to reinforce Andrew's point.

So the message I would, let's take two parts to the message. The first part, as you said quite rightly, is look, we've got good news. The disinflation process, as I showed in the first chart, you know, not only continues but actually has been faster than we expected. And not just faster over the last year, faster than since we were last here in August. And that's good and it's encouraging. There is greater uncertainty out there now. I would, you know, point to two things. I mean, first of all, there is greater global uncertainty, you know, without doubt. The second thing to say is that there are, of course, there are domestic uncertainties. And I, you know, I pointed to two of them in my remarks. One was just, we need to obviously see how the budget measures pass through in terms of their economic effects. And then I pointed again, as I have done in the past, obviously to the labor market and how the adjustment of the labor market continues. And those things obviously are related as well. So it's a point about uncertainty. And that's why, as you'll have observed, the word gradual once again appears in our language.

Yeah, I mean, I'm sure Claire wants to come in, but let me make two points to start with. First of all, the point we were making on import prices is not really about, it's not at all about the US election. It's really based on an observation in the data that the relationship between world export prices and Sterling and UK Sterling import prices has not moved as we expected. In a sense, they've not really moved together. We've seen some divergence with stronger UK import prices than we would have expected based on world export prices. And frankly, we've adjusted our assumption to reflect the fact that we don't see any evidence of that really sort of coming to a conclusion. On the second point about the US election, can I just make this point first of all, you know, we always respond to announced policies, and that's true in the world, it's true in the UK, not to, you know, stories about what they might be. So we're not going to respond to anything. The second thing I'll make just to be very clear on this, you know, we work with all US administrations, more obviously on the financial stability side than the monetary policy side, because that's the nature of financial stability versus monetary policy. But we work with all administrations. We will look forward to working with the new US administration. We worked with the previous Trump administration, we work with the current administration, and that's our job. I mean, that's what we do. We do it without any, if you like, sort of, you know, presumptions, and we will do that constructively.

Well, I mean, the UK is an open economy, let's, you know, that's one of the things we always say about the UK economy, and it's true, it's an open economy. Of course, many economies are open, so we're not unusual in that respect. So look, I think we will have to watch this very, very closely, as we will. We'll watch it very closely. As I said, I'm not going to make any, you know, any presumptions about what will happen, because I don't think that's either consistent with our policy remit or B, wise, frankly. I think let's see what happens. And, you know, there will, I'm sure, be a very open dialogue between both our government and the US administration. And I say, we, appropriate just to reiterate the point, you know, we work very closely with US administrations because it's obviously the right thing to do. And, you know, we will no doubt over time be able to get a better sense of A, what the policies are, and then B, to answer your question, how they, you know, might affect the UK economy. And of course, we'll do that. But I'm just not going to, I don't think it's useful or wise to enter into sort of speculation at the moment of what they might be, because we just don't know.

Well, that's of course the Ben Broadbent Memorial question. Yeah, but you're not, you're probably safe from getting the Ben Broadbent Memorial answer where he'll talk about John Williams, the Welsh economist. So we'll save you that one. Look, start with the interest rate points. Look, let me give you one, I think, quite interesting fact. And actually, I'll take it back to sort of a couple of days ago. If you look at movements along the interest rate curve from the beginning of October to a couple of days ago, and you compare the US curve with the UK curve, they basically moved by about the same amount. You know, particularly if you go out sort of a bit along the curve. So, you know, what I would say from that is there's clearly quite a lot of international, you know, input going on to that. And certainly when our staff do their decompositions of contributions to curve movements, which they do for us every time we meet, there's quite a substantial international element in that. On the neat way you tried to get to the r-star question, that we don't, you know, very, very deliberately we do not have a level of the equilibrium interest rate or the neutral interest rate, r-star, call it what you like, in mind, because it will be very dependent on factors. And, you know, there is a long-run concept which is much more related to sort of structural things in the economy, and then there's a shorter-run concept which is more cyclical and more immediately relevant, which, you know, will be influenced by a lot of things, some of which we've already talked about. So, you know, I'm always very careful in saying I don't expect interest rates to go back to the very low levels that they were at prior to obviously increasing rates, unless there was some completely unknown shock of the nature of the sort that caused them to go down in the first place, you know, back into the financial crisis and COVID. So that, but that obviously leaves quite a bit of territory in between for us to, you know, for that rate to settle in.