Bank of England Holds Rates Steady at 5%, Focuses on Inflation Risks

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The Monetary Policy Committee (MPC) of the Bank of England met on 18 September 2024 and made key decisions regarding interest rates and other monetary policies aimed at managing inflation and supporting economic growth. The committee’s primary mandate remains to achieve the UK government’s inflation target of 2% while promoting economic growth and employment.

At the September meeting, the MPC voted by a majority (8-1) to keep the Bank Rate unchanged at 5%. This decision followed the previous month’s cut from 5.25% to 5%, which had marked the first reduction in over four years. One member of the committee preferred to lower the Bank Rate further to 4.75%, but the majority believed that maintaining the current rate was appropriate given ongoing inflationary pressures. Despite recent improvements, inflation had not yet fallen sufficiently for the committee to ease the monetary stance more aggressively.

The MPC’s decision was guided by the need to maintain a restrictive monetary policy to control persistent inflationary pressures. The committee emphasized the importance of keeping inflation expectations well anchored and ensuring that inflation would return to the 2% target in a timely and sustainable manner. The MPC also voted unanimously to reduce the stock of UK government bonds held for monetary policy purposes by £100 billion over the next 12 months, bringing the total down to £558 billion. This move aligns with the Bank’s broader strategy of quantitative tightening, aimed at reducing its balance sheet while keeping market disruptions minimal.

The committee discussed three possible scenarios related to inflation persistence. In the most optimistic scenario, the global shocks that had driven inflation higher would continue to unwind, leading to weaker wage and price-setting dynamics, thus requiring less restrictive monetary policy. The second scenario foresaw a period of economic slack, where GDP might fall below potential, and the labor market would need to ease further to bring inflation down. The final, more pessimistic scenario suggested that structural shifts in the economy, such as changes in wage and price-setting, might necessitate keeping monetary policy tighter for longer.

Globally, economic activity had remained steady, although there were some indications of a softening outlook, particularly with falling oil prices. The MPC noted that the UK economy had seen limited surprises relative to the expectations set in the August Monetary Policy Report. GDP growth was expected to stabilize at around 0.3% per quarter, with inflation projected to rise slightly toward the end of the year as the previous year’s energy price declines would no longer influence the annual inflation comparison.

The labor market had continued to loosen, but remained tight by historical standards. Wage growth had moderated to 4.9% in the three months to July, while household inflation expectations had largely normalized to close to their historical averages. Nonetheless, inflation in services remained elevated, which contributed to the committee’s cautious approach to easing policy further.

In conclusion, the MPC opted to maintain a cautious stance, with most members agreeing that monetary policy needed to remain restrictive until the risks of inflation persistence had dissipated significantly

For the full summary and minutes.