The Bank of England kept the base rate at 5.25 percent for the second consecutive meeting of the Monetary Policy Committee.
But the narrow 6-3 vote margin that drove the decision highlights a precarious outlook for the UK economy, with Bank of England forecasts now pointing to rising levels of unemployment, weak economic growth and a inflation that will remain high for some time.
Crucially, Governor Andrew Bailey said it is “too early to think about rate cuts”, suggesting the path forward for interest rates is static – or could rise further.
This is Money outlines key data and charts from the Bank of England’s November Policy Report.
Economic growth is expected to stabilize until the end of this year.
Economic growth
Gross domestic product growth is expected to have been stable in the first quarter, weaker than the Bank of England projected in its August forecast, while the fourth quarter is now forecast to rise 0.1 percent in the last three months of the year.
The Bank of England said that while some forecasters point to a “slight contraction” in the fourth quarter, “others are less pessimistic.”
However, the economy is expected to stagnate in the coming years, with growth “well below historical averages in the medium term.”
Unemployment is expected to increase in the coming years
Key indicators point to a weakening labor market
Unemployment
Unemployment is expected to rise steadily over the next three years, topping 5 per cent by the end of 2026, with the MPC raising unemployment expectations for the second time this year.
Key indicators, such as falling vacancy numbers, suggest the labor market is weakening, but is not yet in negative territory.
However, it is worth noting that the Office for National Statistics’ methodology regarding employment has faced recent criticism, particularly in terms of “economic inactivity”.
The Bank of England said: “The ONS has… published experimental estimates of employment and unemployment which should be interpreted with caution.”
Inflation to remain above the Bank of England’s 2% target for some time
Inflation
Consumer price inflation, although falling, is expected to remain above the Bank of England’s 2 per cent target for some time.
Its current forecast sees the CPI confirming at 4.75 percent in the fourth quarter of this year, falling to 4.5 and 3.75 percent in the first two quarters of 2024, respectively.
This, the Bank of England says, will be driven by “lower energy, commodity and food price inflation and, beyond January, some fall in services inflation.”
The CPI is not expected to fall back to the 2 percent target until the end of 2025.
And the Bank of England warns: “The risks to [this] Modal inflation projections are biased upward.
‘The second round effects on domestic prices and wages are expected to take longer to disappear than to emerge. There are also upside risks to inflation due to energy prices, given developments in the Middle East.
Wage growth is softening
Salary growth
The Bank of England has been monitoring wage growth closely, concerned about the impact that windfall pay rises are having on the underlying inflation rate.
Average annual growth in private sector weekly earnings was 8 per cent in August, but the Bank of England says a more flexible labor market and falling inflation are expected to contribute to a moderation in wage growth.
The Bank of England said: “With the labor market easing and inflation moderating, some of the upward pressures on wage growth should ease in 2024. Wage growth tends to rise when headline inflation rises. and inflation expectations.
Oil prices are rising while gas futures are elevated compared to pre-Covid levels
Oil and gas prices
High oil and gas prices were initially a key driver of the high levels of inflation we have seen since 2021.
Oil prices in sterling terms have increased by 10 per cent since the Bank of England’s August projections, which has an impact on oil prices and therefore the overall rate of inflation.
The Bank of England said: ‘Significant uncertainty remains around the outlook for wholesale energy prices, including in relation to recent geopolitical developments.
“Although there has been only a relatively limited increase in energy prices so far, uncertainty around future oil prices has increased and the balance of risks around future oil prices has shifted from the bottom to the top. ”
The latest projections from the Bank of England
August Report Updates
The above shows the change from the August report, in regards to GDP, unemployment rates and inflation.
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