Highlights
The Bank of England's decision to reduce the Bank Rate from 5 percent to 4.75 percent signals a strategic effort to balance economic growth with inflation control. While this move supports economic activity, it reflects the BoE's expectation of a slower path toward achieving its 2 percent inflation target, as inflationary pressures are anticipated to ease gradually over time.
The November projections are based on market-implied paths for policy rates, which suggest a decline in the Bank Rate to around 3.5 percent by the end of the three-year forecast period, consistent with the August projections. The sterling effective exchange rate is projected to be 0.5 percent higher than in August but is expected to depreciate slightly over time due to anticipated interest rate differentials.
In terms of the real economy, the UK GDP growth is expected to rise to 1.75 percent in the near term, supported by fiscal stimulus and lower interest rates, but will slow in the medium term as fiscal tightening and external risks weigh on demand. Household spending is projected to follow a similar path, with uncertainties around the impact of higher taxes and geopolitical factors.
CPI inflation in the UK is expected to rise to 2.5 percent by year-end due to base effects but should return to the 2 percent target in the medium term as domestic pressures ease and economic slack emerges. However, the Autumn Budget 2024 will temporarily boost inflation by 0.5 percentage points, while geopolitical and commodity price risks could add external inflationary pressures.
The MPC evaluates three potential scenarios for inflation persistence: rapid normalisation, the necessity for economic flexibility, or structural changes in wage and price setting. Their current projections, which are based on the second scenario, indicate that inflation will return to the 2 percent objective in the medium term, bolstered by emergent economic slack. Nevertheless, a measured policy approach is necessary to mitigate the dangers of inflation persistence.
The Autumn Budget 2024 is expected to increase GDP by 0.75 percent and CPI inflation by 0.5 percentage points at its apex, thereby complicating inflation management. Domestic inflationary pressures are anticipated to persist as the effects of energy prices diminish, driving CPI inflation to 2.75 percent by mid-2025 before tapering back to the target.
The November projections are based on market-implied paths for policy rates, which suggest a decline in the Bank Rate to around 3.5 percent by the end of the three-year forecast period, consistent with the August projections. The sterling effective exchange rate is projected to be 0.5 percent higher than in August but is expected to depreciate slightly over time due to anticipated interest rate differentials.
In terms of the real economy, the UK GDP growth is expected to rise to 1.75 percent in the near term, supported by fiscal stimulus and lower interest rates, but will slow in the medium term as fiscal tightening and external risks weigh on demand. Household spending is projected to follow a similar path, with uncertainties around the impact of higher taxes and geopolitical factors.
CPI inflation in the UK is expected to rise to 2.5 percent by year-end due to base effects but should return to the 2 percent target in the medium term as domestic pressures ease and economic slack emerges. However, the Autumn Budget 2024 will temporarily boost inflation by 0.5 percentage points, while geopolitical and commodity price risks could add external inflationary pressures.
The MPC evaluates three potential scenarios for inflation persistence: rapid normalisation, the necessity for economic flexibility, or structural changes in wage and price setting. Their current projections, which are based on the second scenario, indicate that inflation will return to the 2 percent objective in the medium term, bolstered by emergent economic slack. Nevertheless, a measured policy approach is necessary to mitigate the dangers of inflation persistence.
The Autumn Budget 2024 is expected to increase GDP by 0.75 percent and CPI inflation by 0.5 percentage points at its apex, thereby complicating inflation management. Domestic inflationary pressures are anticipated to persist as the effects of energy prices diminish, driving CPI inflation to 2.75 percent by mid-2025 before tapering back to the target.
Definition
Formerly called the Quarterly Inflation Report, the Monetary Policy Report (MPR) is produced by the Bank of England (BoE) every February, May, August and November. The publication updates the central bank's assessment of recent economic developments at home and abroad and sets out the latest official forecasts for growth and inflation. As such, it provides the economic underpinnings for any change in monetary policy made by the Bank's Monetary Policy Committee (MPC). The MPR is released at the same time as the BoE makes its policy announcement
Description
For analysts who want to know the Monetary Policy Committee's latest thinking on the economy, the MPR provides an in-depth guide. As such it offers key information on economic trends and, in particular, areas where the Bank is primarily focused. The MPR is discussed at a press conference held by the BoE governor shortly after its release.
