Monetary Policy Committee meeting, Bank of England. 21^st September 2023

Bank Rate held at 5.25%.     

For the first time since 4^th November 2021, the Bank of England’s Monetary Policy Committee (MPC) voted to keep Bank Rate unchanged at 5.25%. This rate is the highest level since 2008. Once again, the vote was not unanimous. Four out of nine members - Jon Cunliffe, Megan Greene, Jonathan Haskel and Catherine Mann - voted for a further 0.25% increase. The MPC also voted – unanimously in this case - to reduce the stock of Government bond purchases by £100b. over the next twelve months, a step up from the £80b. in the previous year. 

Inflation in the UK is heading downwards. As of August, consumer prices witnessed a 6.7% year-on-year increase, marking the slowest rate of increase since February 2022, although still way above the Bank of England’s 2% target. While recent increases in the price of oil are slowing the decline in inflation, the MPC believes the cumulative effects of 14 consecutive rises in the cost of borrowing will take some time to be felt by the wider economy. The MPC remains confident that it can curb demand without triggering a recession. Although the Bank of England has revised its projections for the UK economy downward, the estimate of 0.1% growth for Q3 2023 remains in positive territory.

If the Bank of England paid more attention to recent monetary data, its outlook might be more cautious. For four consecutive months, the quantity of M4x broad money has fallen on an annualised quarterly basis. In July, its annual growth rate barely remained positive - the lowest reading since the adoption of  M4x as the preferred broad money measure in September 2009. The July increase in the Counter-Cyclical Buffer, coupled with the decision to further reduce the Bank’s balance sheet, suggest that broad money growth will remain sluggish.

Several indicators highlight how the UK economy is slowing. House prices have been falling on an annual basis for four consecutive months, with prices 4.9% lower in the year to August, the biggest decrease since August 2009. July saw the number of new mortgage approvals fall to a five-month low, with more money being repaid than borrowed. The High Street paints an equally gloomy picture. Retail sales have been declining on an annual basis for well over a year, and July’s figures were 1.2% lower than those of June. Unemployment climbed to 4.3% in July, the highest reading in almost two years.  On a brighter note, wage growth remains strong rising 8.5% in the year to July.

The Bank of England’s own analyses do not envisage any reductions to the cost of borrowing for at least three quarters. While this may well represent the peak of the current tightening cycle, the close vote today, combined with Governor Bailey’s comments that “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures” implies that an additional rate increase remains a possibility. Regardless, monetary indicators suggest that the UK may experience a sharp slowdown in early 2024. Consequently the MPC may find itself having to cut rates sooner than it currently anticipates.

Access further details on the latest monetary developments in the UK in our monthly reports and videos at https://mv-pt.org/monthly-monetary-update/ .

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