The Bank of England held base rate at 5.25 per cent for the second-consecutive Monetary Policy Committee meeting.
But the narrow 6-3 vote margin driving the decision highlights a precarious outlook for the UK economy, with BoE forecasts now pointing to rising levels of unemployment, weak economic growth and an inflation rate that will stay high for some time.
Crucially, Governor Andrew Bailey said it is ‘much too early to be thinking about rate cuts’, suggesting the path forward for interest rates is static – or it could move even higher.
This is Money outlines the key data and charts from the Bank of England’s November Policy Report.
Economic growth is expected to flatline into the end of this year
Economic growth
Gross domestic product growth is expected to have been flat in the first quarter, weaker than the BoE projected in its August forecast, while the fourth quarter is now forecast to creep 0.1 per cent higher in the final three months of the year.
The BoE said that while some forecasters are pointing to a ‘slight contraction’ in the fourth quarter, ‘others are less pessimistic’.
However, the economy is forecast to tread water over the coming years, with growth ‘well below historical averages in the medium term’.
Unemployment is expected to tick higher over the coming years
Key indicators point to a softening employment market
Unemployment
Unemployment is expected to rise steadily over the next three years, going beyond 5 per cent by the end of 2026, with the MPC upping joblessness expectations for the second time this year.
Key indicators, such as falling vacancy numbers, suggest the labour market is softening, but is not yet in negative territory.
However, it is worth noting that the Office for National Statistics’ methodology with regards to employment has faced recent criticism, particularly in terms of ‘economic inactivity’.
The BoE said: ‘The ONS has…published experimental estimates of employment and unemployment that need to be interpreted with caution.’
Inflation will stay above the BoE’s 2% target for some time
Inflation
Consumer price inflation, while falling, is expected to remain above the BoE’s 2 per cent target for some time.
Its current forecast sees CPI confirmed at 4.75 per cent in the fourth quarter of this year, falling to 4.5 and 3.75 per cent in the first two quarters of 2024, respectively.
This, the BoE says, will be driven by ‘lower energy, core goods and food price inflation and, beyond January, by some fall in services inflation’.
CPI is not expected to fall back to the 2 per cent target until the end of 2025.
And, the BoE warns: ‘The risks to [this] modal inflation projection are skewed to the upside.
‘Second-round effects in domestic prices and wages are expected to take longer to unwind than they did to emerge. There are also upside risks to inflation from energy prices given events in the Middle East.’
Wage growth is softening
Wage growth
Wage growth has been keenly watched by the BoE, which has been concerned about the impact bumper pay rises are having on the underlying rate of inflation.
Annual private sector regular average weekly earnings growth was 8 per cent in August, but the BoE says a looser labour market and falling inflation are expected to contribute to a moderation in wage growth.
The BoE said: ‘With the labour market now loosening, and inflation set to moderate, some of the upward pressures on wage growth should ease in 2024. Wage growth tends to rise when headline inflation and inflation expectations increase.’
Oil prices are on the up 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.
Sterling oil prices have risen by 10 per cent since the BoE’s August projections, which has an impact on petrol prices and therefore the overall rate of inflation.
The BoE said: ‘Significant uncertainty remains around the outlook for wholesale energy prices, including related to recent geopolitical developments.
‘Although there has so far been only a relatively limited rise in energy prices, uncertainty around future oil prices has increased and the balance of risks around future oil prices has shifted from the downside to the upside.’
The BoE’s latest projections
Updates from the August report
The above shows the change from the August report, when it comes to GDP, unemployment rates and inflation.
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