The Bank of England (BoE) maintained the Bank Rate at 4.75% during its December meeting, a decision shaped by rising inflation and weakening economic activity across the UK. The Monetary Policy Committee (MPC) voted 6-3 in favor of holding the rate steady, with three dissenting members advocating for a 0.25 percentage point reduction to 4.5%.
Inflation: The decision follows the latest inflation report, which revealed that annual price growth accelerated to 2.6% in November, up from 1.7% in September. This increase was slightly above expectations, driven primarily by stronger-than-anticipated inflation in core goods and food prices.
- The uptick underscores persistent inflationary pressures, a key concern for policymakers.
Economic Indicators: The BoE’s staff noted a decline in most indicators of near-term economic activity. GDP growth for the end of 2023 is now expected to fall short of the projections outlined in the November Monetary Policy Report.
- The labor market, which the BoE now considers “broadly in balance,” has shown signs of stabilization.
- However, wage dynamics remain a concern. Private sector regular average weekly earnings saw a sharp increase in the three months to October, but these figures have been more volatile compared to other wage measures.
The MPC highlighted two key risks that could shape the inflation outlook:
- Constrained supply: Persistent supply-side challenges could sustain upward pressure on prices.
- Weaker demand: A slowdown in demand could create spare capacity in the economy, potentially leading to a decrease in inflation.
The Committee emphasized its commitment to closely monitoring these risks and adjusting monetary policy as needed to steer inflation back toward its target.
Bottom Line: The BoE’s challenges echo those faced by central banks worldwide, as inflation proves to be a global issue. Policymakers are grappling with how to balance price stability with fostering economic growth, navigating a delicate path through volatile economic conditions.
