Monetary Policy Summary

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 1 November 2023, the MPC voted by a majority of 6–3 to maintain Bank Rate at 5.25%. Three members preferred to increase Bank Rate by 0.25 percentage points, to 5.5%.

The Committee’s updated projections for activity and inflation are set out in the accompanying November Monetary Policy Report. These are conditioned on a market-implied path for Bank Rate that remains around 5¼% until 2024 Q3 and then declines gradually to 4¼% by the end of 2026, a lower profile than underpinned the August projections.

Since the MPC’s previous meeting, long-term government bond yields have increased across advanced economies. GDP growth has been stronger than expected in the United States. Underlying inflationary pressures in advanced economies remain elevated. Following events in the Middle East, the oil futures curve has risen somewhat while gas futures prices are little changed.

UK GDP is expected to have been flat in 2023 Q3, weaker than projected in the August Report. Some business surveys are pointing to a slight contraction of output in Q4 but others are less pessimistic. GDP is expected to grow by 0.1% in Q4, also weaker than projected previously.

The MPC continues to consider a wide range of data to inform its view on developments in labour market activity, rather than focusing on a single indicator. The increasing uncertainties surrounding the Labour Force Survey underline the importance of this approach. Against a backdrop of subdued economic activity, employment growth is likely to have softened over the second half of 2023, and to a greater extent than projected in the August Report. Falling vacancies and surveys indicating an easing of recruitment difficulties also point to a loosening in the labour market. Contacts of the Bank’s Agents have similarly reported an easing in hiring constraints, although persistent skills shortages remain in some sectors.

Pay growth has remained high across a range of indicators, although the recent rise in the annual rate of growth of private sector regular average weekly earnings has not been apparent in other series. There remains uncertainty about the near-term path of pay, but wage growth is nonetheless projected to decline in coming quarters from these elevated levels.

Twelve-month CPI inflation fell to 6.7% both in September and 2023 Q3, below expectations in the August Report. This downside news largely reflects lower-than-expected core goods price inflation. At close to 7%, services inflation has been only slightly weaker than expected in August. CPI inflation remains well above the 2% target, but is expected to continue to fall sharply, to 4¾% in 2023 Q4, 4½% in 2024 Q1 and 3¾% in 2024 Q2. This decline is expected to be accounted for by lower energy, core goods and food price inflation and, beyond January, by some fall in services inflation.

In the MPC’s latest most likely, or modal, projection conditioned on the market-implied path for Bank Rate, CPI inflation returns to the 2% target by the end of 2025. It then falls below the target thereafter, as an increasing degree of economic slack reduces domestic inflationary pressures.

The Committee continues to judge that the risks to its 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. Taking account of this skew, the mean projection for CPI inflation is 2.2% and 1.9% at the two and three-year horizons respectively. Conditioned on the alternative assumption of constant interest rates at 5.25%, which is a higher profile than the market curve beyond the second half of 2024, mean CPI inflation returns to target in two years’ time and falls to 1.6% at the three-year horizon.

The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. Monetary policy will ensure that CPI inflation returns to the 2% target sustainably in the medium term.

Since the MPC’s previous decision, there has been little news in key indicators of UK inflation persistence. There have continued to be signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally. Given the significant increase in Bank Rate since the start of this tightening cycle, the current monetary policy stance is restrictive. At this meeting, the Committee voted to maintain Bank Rate at 5.25%.

The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit. The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.

1: The economic outlook

1.1: The conditioning assumptions underlying the MPC’s projections

As set out in Table 1.B, the MPC’s projections are conditioned on:

• The paths for policy rates in advanced economies implied by financial markets, as captured in the 15-working day average of forward interest rates to 24 October (Chart 2.5). The market-implied path for Bank Rate in the United Kingdom has fallen by just over ½ percentage point on average over the next three years compared with the equivalent period at the time of the August Report. The path for Bank Rate underpinning the November projections remains around 5¼% until 2024 Q3 and then declines gradually to 4¼% by the end of 2026. There has been a significant increase in longer-term government bond yields globally since August (Section 2.1).
• A path for the sterling effective exchange rate index that is around 1½% lower on average than in the August Report, and is depreciating gradually over the forecast period given the role for expected interest rate differentials in the Committee’s conditioning assumption.
• Wholesale energy prices that follow their respective futures curves over the forecast period. Since August, spot oil prices and the oil futures curve have risen, while gas futures prices are little changed. Significant uncertainty remains around the outlook for wholesale energy prices, including related to recent geopolitical developments (Key judgement 3).
• UK household energy prices that move in line with Bank staff estimates of the Ofgem price cap implied by the path of wholesale energy prices (Section 2.3).
• Fiscal policy that evolves in line with announced UK government policies to date, and so does not include the contents of the Autumn Statement on 22 November.

1.2: Key judgements and risks

1.2: Key judgement 1

GDP is expected to be broadly flat in the first half of the forecast period and growth is projected to remain well below historical averages in the medium term. That reflects the significant increase in Bank Rate since the start of this tightening cycle, subdued potential supply growth, and a waning boost from fiscal policy.

UK GDP is expected to have been flat in 2023 Q3, weaker than expected in the August Monetary Policy Report (Section 2.2). Indicators of growth in Q4 are mixed. Some business surveys are pointing to a slight contraction in GDP, but others are less pessimistic. Many contacts of the Bank’s Agents have continued to report weak activity growth and a subdued outlook. On balance, Bank staff expect GDP to grow by 0.1% in the fourth quarter, also weaker than projected in August.

Household consumption growth is now expected to be similarly weak during the second half of this year, consistent with recent declines in retail sales volumes, consumer services output and consumer confidence. Nonetheless, real labour income growth has been slightly stronger than expected and workers do not appear to have become more pessimistic about the security of their own jobs.

For a number of forecast rounds, the Committee has made a judgement to boost the expected path of demand in light of the surprising resilience of economic activity. This reflected a number of factors, including the possibility of lower precautionary saving by households, in turn related to a lower risk of job loss given continued strength in labour market activity. Developments since August, including in the labour market (Key judgement 2), suggest that economic activity has been somewhat less resilient over recent months. As a result, in its latest growth projection, the Committee has scaled back somewhat the extent of this judgement to boost demand, but has not taken it out completely.

Given the significant increase in Bank Rate since the start of this tightening cycle, the current monetary policy stance is restrictive. There are increasing signs of some impact of tighter policy on momentum in the real economy (Section 3.3). Based on the average relationships over the past between Bank Rate, other financial instruments and economic activity, Bank staff estimate that more than half of the impact of higher interest rates on the level of GDP is still to come through, although there is significant uncertainty around that estimate. The Committee will continue to monitor closely the impact of the significant increase in Bank Rate. It will also continue to keep under review the relationship between Bank Rate and economic activity, including how it may have changed during the current tightening cycle.

Taken together, the pass-through of past rises in interest rates and the latest market-implied interest rate path on which the forecast is conditioned (Section 1.1) continue to push down on GDP over the forecast period. Nevertheless, the fall in the market path over recent months pushes up on GDP in this forecast compared with the August projection, all else equal.

As in recent projections, and taking account of all announced government plans, the positive impacts of past fiscal loosening measures related to the pandemic and the energy price shock (Section 3.1) on the level of GDP unwind, which pulls down on GDP growth throughout much of the forecast period. Real government consumption is, nevertheless, expected to grow quite strongly in 2024, bouncing back from the negative impact on spending associated with public sector strike activity in 2023.

International growth has remained subdued (Section 2.1) and the path of global GDP is expected to be broadly similar to that in the August Report. In the MPC’s November projection, annual UK-weighted world GDP growth is projected to rise from around 1½% in 2023 to around 2% in the medium term (Table 1.D). That compares with average annual growth of around 2½% in the decade prior to the pandemic.

Although aggregate global growth is evolving largely as expected, US GDP growth has been stronger than expected, while the euro area has seen weaker growth. As in the United Kingdom, the impact of past monetary policy tightening is dragging on activity, with fiscal policy and the rundown of excess household saving underpinning the resilience of US demand. Growth in the euro area is expected to pick up over the forecast period, while growth in the United States and China is projected to fall back somewhat.

Overall in the Committee’s November projection, UK GDP is projected to remain broadly flat in the first half of the forecast period. As well as the impact of higher interest rates, this reflects a waning boost from fiscal policy and relatively weak potential supply (Key judgement 1 in the February 2023 Report and Key judgement 2 in this Report). GDP growth recovers over the second half of the forecast period, although it remains well below historical averages in the medium term. Calendar-year GDP growth is expected to be marginally positive in 2024, and to increase by ¼% in 2025 and by ¾% in 2026 (Table 1.D). Four-quarter GDP growth picks up to slightly over 1% by 2026 Q4 (Chart 1.1).

Relative to the August Report projection, four-quarter GDP growth is expected to be slightly weaker throughout the forecast period. Abstracting from the increase in the historical level of GDP related to the Blue Book 2023 revisions (Box C), the level of GDP has been revised down by around 1% by the end of the forecast period compared with the August Report. That lower level of activity reflects recent weaker-than-expected GDP data and the Committee’s related decision in this forecast to reduce somewhat its previous judgement boosting expected demand. Those factors have been offset partially by the projected boost to GDP from the lower path of market interest rates on which the forecast is conditioned and, to a lesser degree, the estimated impact on growth of the recent exchange rate depreciation (Section 1.1).

Chart 1.1: GDP growth projection based on market interest rate expectations, other policy measures as announced

Footnotes

• The fan chart depicts the probability of various outcomes for GDP growth. It has been conditioned on Bank Rate following a path implied by market yields, but allows the Committee’s judgement on the risks around the other conditioning assumptions set out in Section 1.1, including wholesale energy prices, to affect the calibration of the fan chart skew. To the left of the shaded area, the distribution reflects uncertainty around revisions to the data over the past. To the right of the shaded area, the distribution reflects uncertainty over the evolution of GDP growth in the future. If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective judgement is that the mature estimate of GDP growth would lie within the darkest central band on only 30 of those occasions. The fan chart is constructed so that outturns are also expected to lie within each pair of the lighter aqua areas on 30 occasions. In any particular quarter of the forecast period, GDP growth is therefore expected to lie somewhere within the fan on 90 out of 100 occasions. And on the remaining 10 out of 100 occasions GDP growth can fall anywhere outside the aqua area of the fan chart. Over the forecast period, this has been depicted by the grey background. See the Box on page 39 of the November 2007 Inflation Report for a fuller description of the fan chart and what it represents.

In the GDP projection conditioned on the alternative assumption of constant interest rates at 5.25% over the forecast period, growth is lower in the forecast period compared with the MPC’s projection conditioned on market rates, as the constant rate assumption is above the market curve to an increasing degree beyond the end of next year.

Within the expenditure components underpinning the November GDP projection conditioned on market interest rates, calendar-year household spending is expected to grow by ½% this year, to be flat in 2024, and to rise by ½% in 2025 and by 1% in 2026 (Table 1.D). This projected path of consumption is weaker than in the August Report. Real post-tax labour income is projected to grow by ¾% this year and by 1% in 2024, but more modestly in 2025 and 2026. Taking account of all components of household income, the saving ratio is expected to be broadly unchanged over much of the forecast period, flatter than the downward-sloping path projected in the August Report. That reflects a higher degree of precautionary saving than expected previously, in part owing to the higher profile for unemployment (Key judgement 2), and is broadly consistent with the Committee’s decision in this forecast to reduce somewhat the scale of its judgement boosting expected spending.

In large part reflecting the transmission of higher interest rates (Section 3.3), housing investment is expected to fall significantly, by 5¾% in 2023, by 6¾% 2024 and by 2¾% in 2025. This profile is similar to that in the August Report, and is consistent with weakness in housing transactions and forward-looking indicators of new housing construction.

Business investment is projected to increase by just under 7% this year, but to fall by 1% in 2024, in part reflecting transport sector related volatility in capital expenditure. As set out in Box D, respondents to a special survey by the Bank’s Agents expect investment growth to slow slightly next year but remain positive. Investment intentions are being held back by economic uncertainty, and by the cost and availability of finance, but supported by the need to invest for a number of reasons such as digitalisation, efficiency, sustainability and maintenance. Further out in the latest projection, business investment is expected to be broadly flat in 2025, before increasing by 2% in 2026.

The risks around the projection for UK GDP growth are judged to be broadly balanced.

There are risks in both directions around the central projections for household spending and GDP, including related to the Committee’s decision in this forecast to scale back somewhat the extent of its judgement to boost expected demand. Spending could be stronger than expected if there is greater resilience in labour market activity (Key judgement 2) and some households choose to save less or run down existing stocks of savings to a greater extent. Conversely, demand could be weaker than expected if some people become more worried about their job security and try to build up their savings to a greater extent. The latest Bank/NMG survey suggests that, among those who are planning to change their saving habits compared with the previous six months, the share of households who are planning to save more than usual over the next six months is expected to rise to around half (Chart 3.5).

There are also risks related to the transmission of monetary policy, including the response of consumption to higher interest rates. Although there is a much greater proportion of fixed-rate mortgages than in previous tightening cycles, some mortgagors who anticipate needing to refinance in the future may take greater advance actions to prepare for facing higher interest costs. There could also be non-linearities in the response of consumption to weakness in the housing market via collateral and other channels (Section 3.3). These could, in turn, relate to developments in unemployment and mortgage distress.

Internationally, the risk of higher commodity prices, including related to geopolitical developments, could lead to weaker UK economic activity as well as upward pressure on CPI inflation (Key judgement 3).

1.2: Key judgement 2

The margin of excess demand in the UK economy has diminished over recent quarters and an increasing degree of economic slack is expected to emerge from the start of next year. Unemployment is expected to rise further over the forecast period and exceed the Committee’s upwardly revised estimate of the medium-term equilibrium rate from the end of next year.

As set out in Box C, the upward revisions to GDP in Blue Book 2023 provide limited news about the balance of demand and supply in the market sector economy, and hence domestic inflationary pressures (Key judgement 3). In light of that, the MPC has judged it appropriate to revise up potential supply in line with the revisions to measured GDP, such that the output gap over the past is unchanged.

The Committee continues to judge that there has been a significant margin of excess demand in the economy over the past two years, averaging just under 1% of potential GDP, and in part reflecting the weakness of potential supply. That excess demand has been accounted for by the tightness of the labour market and, prior to 2023, a higher than normal degree of capacity utilisation within companies.

Since around the middle of last year, however, the margin of aggregate excess demand is judged to have been diminishing, such that only a little remains currently. This is consistent with the recent loss of momentum in activity (Key judgement 1) and with other top-down cross-checks of the degree of slack in the economy. Compared with the August Report, the decline in excess demand is judged to be occurring a little faster during the second half of this year than expected previously.

The MPC is continuing to consider the collective steer from a wide range of data to inform its view on labour market developments. As discussed in Box B, there are increased uncertainties around the ONS’s official labour market activity data that have previously been based on the Labour Force Survey (LFS). A decline in response rates has resulted in the ONS temporarily ceasing to publish LFS estimates of employment, unemployment and inactivity from the June data. The ONS has, however, published experimental estimates of employment and unemployment that need to be interpreted with caution.

As discussed in Box B, the Committee is therefore continuing to consider the collective steer from other indicators of labour market activity. Generally speaking, the Committee has a wider set of indicators to draw on for its understanding of developments in employment than it does for developments in the split of non-employment between unemployment and inactivity.

Taken together, a range of indicators suggest that employment growth is likely to have softened over the second half of this year to a greater extent than expected in the August Report, but not turned negative (Section 2.2). Developments in indicators of recruitment difficulties point to a loosening in the labour market. Contacts of the Bank’s Agents have also reported an easing in hiring constraints, although persistent skills shortages remain in some sectors.

Recent LFS data issues notwithstanding, the unemployment rate is expected to be around 4¼% during the second half of 2023, slightly higher than expected in the August Report. On this basis, the vacancies to unemployment ratio, an alternative measure of labour market tightness, has continued to decline.

As discussed in the August Report, there is significant uncertainty about the rate of unemployment consistent with meeting the 2% inflation target in the medium term. Higher-than-expected wage growth after the recent terms of trade shock to the economy suggests that the medium-term equilibrium rate is likely to be temporarily higher, as employees and domestic firms have sought compensation in the form of higher nominal pay and domestic selling prices for the reductions in real incomes that they have experienced. There is also some evidence that the efficiency with which vacancies are matched to those seeking work has decreased over recent years, which would be pushing up more structurally on the equilibrium rate of unemployment. In its November forecast, the Committee has made an additional judgement to increase its estimate of the medium-term equilibrium rate of unemployment from the period since the energy shock started and, to a lesser degree, over the forecast period. This equilibrium rate is judged to be around 4½% currently. This change in judgement is consistent with a somewhat stronger outlook for wage growth and domestic inflationary pressures all else equal (Key judgement 3).

The increase in the equilibrium rate of unemployment also pushes down aggregate supply growth. Four-quarter supply growth is expected to slow from around 1½% currently to around ¾% next year, before rising to around 1¼% in the medium term, the latter of which is similar to in previous Reports. The Committee will undertake a full review of the determinants of the overall longer-term supply capacity of the economy in its next regular stocktake ahead of the February 2024 Report.

Although aggregate supply is expected to be relatively subdued, particularly in the near term, the outlook for demand is weaker, leading to an increasing degree of economic slack emerging in the Committee’s latest projections from the start of next year. The margin of aggregate excess supply is expected to widen to just over 1½% of potential GDP by the end of the forecast period (Table 1.A), broadly similar to its path in the August Report. Relative to August, the projection for excess demand/supply has been pushed up by the lower market path of interest rates and by the Committee’s judgement to raise the equilibrium rate of unemployment, which has reduced potential supply. But the projection has been pushed down by the Committee’s decision to scale back slightly the extent of its judgement boosting expected demand.

In part reflecting indications of relatively optimistic longer-term expectations for output, companies are expected to continue to respond to the weakness in demand by retaining their existing inputs, while using them less intensively and hoarding labour for a prolonged period. This limits to some extent the rise in unemployment that would otherwise be expected to occur. Nevertheless, in the MPC’s November projection, the unemployment rate is projected to continue to rise gradually over the forecast period such that it exceeds the Committee’s updated estimate of the medium-term equilibrium rate from the end of next year, and it reaches just over 5% by the end of 2026 (Chart 1.2). This is slightly higher than in the August Report, but is consistent with a similar degree of labour market looseness, reflecting the Committee’s judgement to raise further the equilibrium rate in this forecast.

Chart 1.2: Unemployment rate projection based on market interest rate expectations, other policy measures as announced

Footnotes

• The fan chart depicts the probability of various outcomes for the ILO definition of unemployment. It has been conditioned on Bank Rate following a path implied by market yields, but allows the Committee’s judgement on the risks around the other conditioning assumptions set out in Section 1.1, including wholesale energy prices, to affect the calibration of the fan chart skew. The coloured bands have the same interpretation as in Chart 1.1, and portray 90% of the probability distribution. Up to June 2023, this fan chart is based on LFS unemployment data. Beyond this point, the Committee is drawing on the collective steer from other indicators of unemployment to inform its projection (see Box B). The fan begins in 2023 Q3, a quarter earlier than for CPI inflation. A significant proportion of this distribution lies below Bank staff’s current estimate of the long-term equilibrium unemployment rate. There is therefore uncertainty about the precise calibration of this fan chart.

In projections conditioned on the alternative assumption of constant interest rates at 5.25% over the forecast period, the unemployment rate rises to a greater extent across the forecast period compared with the MPC’s projection conditioned on market rates, as the constant rate assumption is above the market curve to an increasing degree beyond the end of next year.

The risks around the unemployment rate projection are judged to be broadly balanced.

Reflecting the considerable uncertainties around interpreting estimates from the Labour Force Survey, there are risks in both directions around the recent path of the unemployment rate, and hence the outlook for unemployment and labour market tightness. The labour market could remain tighter than assumed for a number of economic reasons, including the upside risks around the outlook for demand (Key judgement 1). Conversely, the labour market could loosen more rapidly than assumed, again including because of any downside risks to demand.

There also remains significant uncertainty around the Committee’s updated assumption for the path of the equilibrium rate of unemployment, news in which would, holding demand fixed, have implications for labour market tightness and inflationary pressures. In particular, it is difficult to judge how quickly some of the factors pushing up the equilibrium rate recently could fade over the forecast period, and the extent to which there are greater structural factors, such as interactions with the benefits system, at play.

1.2: Key judgement 3

Second-round effects in domestic prices and wages are expected to take longer to unwind than they did to emerge. In the modal forecast conditioned on the market-implied path of market interest rates, an increasing degree of slack in the economy and declining external cost pressures lead CPI inflation to return to the 2% target by the end of 2025 and to fall below target thereafter. The Committee continues to judge that the risks are skewed to the upside. Taking account of this skew, mean CPI inflation is 2.2% and 1.9% at the two and three-year horizons respectively.

Twelve-month CPI inflation remains well above the MPC’s 2% target, but has fallen back to 6.7% in both September and in 2023 Q3 as a whole, below expectations in the August Report. Most of the downside news since the previous Report reflects lower core goods price inflation. Services inflation has been only slightly weaker than expected in August.

Twelve-month CPI inflation is expected to continue to fall quite sharply in the near term, to below 5% in October, as the reduction in the Ofgem household energy price cap more than offsets the impact on motor fuel costs of the recent rise in sterling oil prices (Section 2.3). CPI inflation is projected to decline to an average of 4.6% in 2023 Q4, slightly lower than expected in the August Report, and then to 4.4% in 2024 Q1 and 3.6% in 2024 Q2 (Table 1.C). This decline is expected to be accounted for by lower energy, core goods and food price inflation and, beyond January, by some fall in services price inflation.

Based on the latest paths of oil and gas futures prices, the direct energy contribution to inflation is slightly higher throughout the forecast period than in the Committee’s previous forecast. In absolute terms, this direct energy contribution remains slightly negative over the second half of the forecast period.

Four-quarter UK-weighted world export price inflation, excluding the direct effect of oil prices, is estimated to have been slightly negative in 2023 Q2 and is expected to decline more sharply over the next year, though by slightly less than anticipated in the August Report. The weak absolute profile continues to reflect the clearing of global supply chain bottlenecks and easing producer price pressures, particularly in China. World export price inflation then turns slightly positive from the middle of 2025, broadly unchanged from the August Report. The recent depreciation of the sterling exchange rate (Section 1.1) will put upward pressure on UK import price inflation, and over time on CPI inflation, relative to the August Report. Overall, import prices are projected to fall by 1¾% in 2023, a lesser fall than expected in the August Report, and by 3% in 2024 (Table 1.D).

The MPC is continuing to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole (Key judgement 1), including a range of measures of the underlying tightness of labour market conditions (Key judgement 2), wage growth and services price inflation.

Services CPI inflation has remained elevated and somewhat stronger than can be explained by a simple empirical model based on developments in labour and non-labour input costs. There has, however, been some signs of a turning point in a measure of underlying inflationary pressures in consumer services prices (Chart 2.18).

Annual private sector regular average weekly earnings (AWE) growth has increased further to 8.0% in the three months to August, materially above expectations in the August Report. This most recent rise in growth is difficult to reconcile with other indicators of pay growth (Section 2.3). Most of these have tended to be more stable at rates of growth that are high but not quite as elevated as the AWE series. For example, a Bank staff proxy for the private sector based on HMRC PAYE Real Time Information shows median pay growth of around 7% currently.

Recent outturns in earnings growth have been stronger than standard models of wage growth, based on productivity, short-term inflation expectations and a measure of economic slack, would have predicted (Chart 1.3). The near-term outlook for pay growth is also expected to be somewhat stronger than projected in the August Report. The annual growth rate of private sector regular AWE is nonetheless still projected to decline in coming quarters, to below 6% next spring and to just below 5% by the end of 2024. This is broadly consistent with the forward-looking indications from the Decision Maker Panel and early evidence from the Bank’s Agents on private sector pay settlements next year.

Chart 1.3: Projections for private sector regular average weekly earnings four-quarter growth ^(a)

Footnotes

• Sources: Bloomberg Finance L.P., Citigroup, ONS, YouGov and Bank calculations.
• (a) The shaded swathe represents a range of projections from three statistical models of nominal private sector regular average weekly earnings growth, including a wage equation based on Yellen (2017), a wage equation based on Haldane (2018) and a simple error-correction model based on productivity, inflation expectations and slack. The slack measure for these models is based on the MPC’s estimate of the unemployment gap. The projections are dynamic, multi-step ahead forecasts beginning at a point within the models’ estimation periods and are sensitive to data revisions, which can lead to changes in the swathe over the past as well as over the forecast period.

In the MPC’s modal projection, private sector regular AWE growth falls to around 3% by the end of the forecast period, as short-term inflation expectations are assumed to fall back and a margin of spare capacity is expected to open up in the labour market in the medium term (Key judgement 2). This is a slightly higher medium-term profile for AWE growth compared with the August Report.

Private sector regular AWE growth is also expected to ease more slowly than the range of forecasts from a suite of wage models would predict (Chart 1.3). These empirical models illustrate what could happen if future pay setting is based on inflation expectations that take account of the sharply downward near-term path of CPI inflation among other factors. But there is insufficient evidence at present to be confident that wages will be set in this way.

This difference between empirical model outputs and the November projection is therefore one way of demonstrating the MPC’s continuing judgement that second-round effects in both domestic prices and wages are expected to take longer to unwind than they did to emerge. Reflecting the higher expected path of wage growth, the Committee has decided in this forecast to increase slightly the scale of its judgement on the persistence of domestic prices in its modal projection, crystallising further some of the upside risks from second-round effects that have been incorporated into the mean projection previously. This is in addition to the Committee’s decision in this forecast to increase the medium-term equilibrium rate of unemployment (Key judgement 2), which has a similar effect on increasing the persistence of wage growth and domestic inflationary pressures.

In the MPC’s modal projection conditioned on the market-implied path of interest rates as captured in the 15-working day average to 24 October, CPI inflation declines to below the 2% target from the end of 2025, as an increasing degree of slack in the economy reduces domestic inflationary pressures alongside declining external cost pressures. CPI inflation is projected to be 1.9% in two years’ time and 1.5% in three years (Table 1.C and Chart 1.4). Compared with the August Report modal projection, CPI inflation is expected to return to close to the 2% target slightly less rapidly in the middle of the forecast period, reflecting higher energy and other import price inflation, with the latest profile relatively flat around 2% over the four quarters from 2025 Q2.

Chart 1.4: CPI inflation projection based on market interest rate expectations, other policy measures as announced

Footnotes

• The fan chart depicts the probability of various outcomes for CPI inflation in the future. It has been conditioned on Bank Rate following a path implied by market yields, but allows the Committee’s judgement on the risks around the other conditioning assumptions set out in Section 1.1, including wholesale energy prices, to affect the calibration of the fan chart skew. If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective judgement is that inflation in any particular quarter would lie within the darkest central band on only 30 of those occasions. The fan chart is constructed so that outturns of inflation are also expected to lie within each pair of the lighter orange areas on 30 occasions. In any particular quarter of the forecast period, inflation is therefore expected to lie somewhere within the fans on 90 out of 100 occasions. And on the remaining 10 out of 100 occasions inflation can fall anywhere outside the orange area of the fan chart. Over the forecast period, this has been depicted by the grey background. See the Box on pages 48–49 of the May 2002 Inflation Report for a fuller description of the fan chart and what it represents.

In the modal projection conditioned on the alternative assumption of constant interest rates at 5.25% over the forecast period, CPI inflation is expected to be 1.7% and 1.2% in two years’ and three years’ time respectively (Chart 1.5). These are lower than the Committee’s modal forecasts at the same horizons conditioned on market rates, as the constant rate assumption is above the market curve to an increasing degree beyond the end of next year.

Chart 1.5: CPI inflation projection based on constant interest rates at 5.25%, other policy measures as announced

Footnotes

• This fan chart depicts the probability of various outcomes for CPI inflation in the future, conditioned on the assumptions in Table 1.A footnote (b), apart from for Bank Rate, with this chart conditioned on constant interest rates at 5.25%. The fan chart has the same interpretation as Chart 1.4.

The risks around the modal CPI inflation projection are judged to remain skewed to the upside.

There remain considerable uncertainties around the pace at which CPI inflation will return sustainably to the 2% target.

There are near-term risks in both directions around the paths of CPI inflation and pay growth. On the downside, weakness in non-labour input cost growth, including recent developments in producer price indices, could lead to a faster-than-expected decline in consumer goods price inflation. On the upside, the recent rise in private sector regular AWE growth could prove to be a better guide to near-term wage growth dynamics than the steer from other indicators of pay.

In the medium term, there remain considerable risks around the Committee’s judgement that second-round effects in domestic prices and wages are expected to take longer to unwind than they did to emerge. On the one hand, these risks may be more balanced following the MPC’s decision this round to increase further its assumption for the medium-term equilibrium rate of unemployment, owing both to resistance to past losses in real income and to more persistent labour market frictions (Key judgement 2), and the decision to increase slightly its judgement on the persistence of domestic prices. On the other hand, it is possible that the higher path of pay growth puts even greater upward pressure on domestic price inflation over the forecast period. There could remain an inconsistency between the wage and domestic price profiles in the modal projections, such that companies seek to rebuild their squeezed profit margins to a greater extent than has been assumed. Nevertheless, the Bank’s Agents report that firms generally have limited scope to rebuild margins significantly by raising their prices.

The pace at which CPI inflation falls back to the 2% target will also depend on inflation expectations. An upside risk to the inflation outlook is that households and firms are less confident that inflation will fall back quickly and do not factor such a decline into their wage and price-setting behaviour. Since the August Report, indicators of household and corporate short-term inflation expectations have tended to decline further, while medium-term inflation compensation measures in financial markets have remained above their long-term averages. The Committee will continue to monitor measures of inflation expectations very closely and act to ensure that longer-term inflation expectations are anchored at the 2% target.

There are upside risks around the modal projection for UK CPI inflation from international factors. There remains the possibility of more persistence in consumer price inflation in the UK’s major trading partners, for similar reasons to the risks of stronger domestic inflationary pressures at home including the tightness of labour markets, and wage and services price inflation remaining elevated for longer than expected.

In addition, geopolitical risks have increased following events in the Middle East. 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, as indicated by implied volatilities and risk reversals in financial markets. A larger shock to energy prices could mean that CPI inflation falls back to the 2% target more slowly than currently expected, through both direct and second-round effects, while also leading to weaker growth (Key judgement 1).

Overall, the Committee judge that the risks around the modal projection for CPI inflation remain skewed to the upside, primarily reflecting the possibility of more persistence in domestic wage and price-setting, but also the increasing upside risk to inflation from energy prices now. This pushes up on the mean, relative to the modal, inflation projections in the forecast. Conditioned on market interest rates, mean CPI inflation is 2.2% and 1.9% at the two and three-year horizons respectively.

In the mean projection conditioned on the alternative assumption of constant interest rates at 5.25% over the forecast period, CPI inflation is expected to be 2.0% and 1.6% in two years’ and three years’ time respectively. This constant rate projection also returns inflation to the 2% target three quarters earlier than the mean market rate forecast.

2: Current economic conditions

Chart 2.1: GDP growth is expected to be flat in 2023 H2, the unemployment rate is expected to continue to drift up and inflation is expected to have fallen in October

Near-term projections ^(a)

Footnotes

• Sources: ONS and Bank calculations.
• (a) The lighter diamonds show Bank staff’s projections at the time of the August 2023 Monetary Policy Report. The darker diamonds show Bank staff’s current projections. Projections for GDP growth and the unemployment rate are quarterly and show 2023 Q3 and Q4 (August projections show Q2 to Q4). Projections for CPI inflation are monthly and show October to December 2023 (August projections show July to September 2023). GDP growth rate 2023 Q3 projections are based on official data to August, the CPI inflation figure is an outturn. For unemployment, up to 2023 Q2 the series is based on official LFS data. Beyond this point, the Committee is drawing on the collective steer from other indicators of unemployment to inform its projection.

2.1: Global developments and domestic credit conditions

Global growth remains subdued…

Global growth has remained subdued over the course of 2023. UK-weighted world GDP is expected to have grown by around 0.4% in 2023 Q3, similar to Q2 and broadly in line with the projection in the August Report. Four-quarter growth in 2023 Q3 is expected to be around 1.5%, below its 2010–19 average of 2.4%. The latest indicators, such as cross-country purchasing managers’ indices (PMIs), suggest that global GDP growth is likely to remain weak in Q4.

Chart 2.2: Global GDP growth continues to be subdued

UK-weighted world four-quarter GDP growth ^(a)

Footnotes

• Sources: Refinitiv Eikon from LSEG and Bank calculations.
• (a) See footnote (c) of Table 1.D for definition. Figures for 2023 Q3 to 2024 Q2 are Bank staff projections. These projections do not include the advance estimate of US 2023 Q3 GDP and the preliminary flash estimate of euro area 2023 Q3 GDP, which were released after the data cut-off.

…with notable regional differences.

Although aggregate global growth has evolved largely as expected, growth in major economies has been diverging. In particular, US GDP growth has been stronger, while the euro area has seen weaker GDP growth. Chinese GDP grew more rapidly than expected in Q3, but has been weaker than before the Covid pandemic for the last few years.

US GDP rose by 1.2% according to the advance estimate for 2023 Q3, faster than projected in the August Report. US growth has been around its pre-pandemic average in recent quarters despite the sharp tightening in monetary policy. Household consumption has grown more quickly than household incomes over 2022–23. This suggests that US households in aggregate have been more willing to run down the significant increase in savings accrued during the Covid pandemic (de Soyres et al (2023) provide an international comparison). The US has also been less exposed to global energy price shocks than Europe, as it is not reliant on gas supplies from Russia. When wholesale gas prices peaked in August 2022, European prices were over 10 times higher than in North America (Broadbent (2023)).

In the euro area, quarterly GDP fell by 0.1% in the 2023 Q3 preliminary flash estimate, following weak growth of around 0.1% in both Q1 and Q2. Tighter monetary policy has reduced growth, and retail energy prices remain high, despite having fallen since late 2022, which has weighed on real incomes and spending. Euro-area households have also tended to maintain savings built up over the pandemic period, rather than spending them. Recent analysis by staff at the ECB (Battistini et al (2023)) shows that most of the increase in household savings has been invested in financial assets such as equities and bonds, rather than in more liquid deposits. This suggests that household savings are less likely to be run down in the near term.

In China, GDP grew by 1.3% in 2023 Q3, up from 0.5% in Q2. Even including 2023 Q3, Chinese GDP growth has slowed since the Covid pandemic. Quarterly GDP growth has averaged around 1% since 2021, whereas 1.5% or more was typical before the pandemic. Other indicators of activity such as PMIs and retail sales have softened on the quarter. Activity in the property sector, which plays a significant role in China’s economy, continued to be weak, with property starts falling by more than 15% over the 12 months to September. While only around 5% of UK exports go to China, its key role in global trade means that the indirect effect, via mutual trading partners, of changes in Chinese demand on the UK can be more significant. And there are other channels, for example via financial markets, through which developments in China can affect the UK (Gilhooly et al (2018)).

Consumer price inflation in advanced economies remains elevated, but it is declining…

Headline inflation rates in the UK, euro area and US have all fallen this year. This largely reflects lower energy price inflation, although food and goods price inflation have also declined, particularly in the US. Nonetheless, inflation remains above central bank targets. In the US, the annual rate of PCE inflation was 3.4% in September, while in the euro area the HICP inflation rate fell to 2.9% in the flash estimate for October. Underlying inflationary pressures have remained elevated across the three regions. Services inflation remains high, as does wage growth. Measures such as the vacancies to unemployment ratio suggest that labour markets remain tighter than before the pandemic, even with the recent loosening in the US and in the UK.

…while global export prices have fallen...

Global export price inflation has eased markedly over the past year, with prices falling across regions in 2023 Q2 (Chart 2.3). This reflects the indirect effects of lower energy prices, the continued clearing of supply chain bottlenecks and weak producer price inflation. Measures of shipping costs have stabilised around their levels before the pandemic, having been significantly elevated in 2021–22.

Chart 2.3: Global export price inflation has fallen significantly

Quarterly change in export prices ^(a)

Footnotes

• Sources: ECB, General Administration of Customs of the People’s Republic of China, US Bureau of Economic Analysis, other national statistical agencies, and Bank calculations.
• (a) ‘Rest of world’ is a weighted average of 31 countries, including China and excluding major oil exporters. Countries are weighted by their share of UK imports. The final data points refer to 2023 Q2.

…although global energy prices have risen since August, and the risk of them rising further has increased.

While global energy prices remain significantly below the levels seen in 2022, they have increased since the August Report. Spot oil prices reached around £75 per barrel in September, and November 2023 futures prices have risen by about 20% since the August Report (Chart 2.4).

Given the subdued outlook for global activity, demand factors are unlikely to have put much upward pressure on oil prices. But oil supply has been reduced by cuts in production by OPEC and Russia, amounting to two million barrels per day over 2023.

Wholesale gas spot prices have also risen, but remain significantly lower and less volatile than in 2022. Wholesale gas futures prices are little changed since August (Chart 2.4). European gas storage levels are high compared with recent years, reducing the likelihood of shortages over the winter.

The risk of energy prices rising further has increased following recent events in the Middle East (Section 1).