The Bank of England’s (BoE) Monetary Policy Committee (MPC) recently announced a rate cut of 0.25 percentage points, bringing the Bank Rate to 4.75%—a decision made to sustain the progress in managing inflation.
This November’s report outlines the MPC’s commitment to balancing inflation control with supporting economic growth, amidst a backdrop of easing global inflation and targeted fiscal boosts from the Autumn Budget 2024.
Inflation Trajectory and Labour Market
The MPC’s main objective remains to keep inflation at the 2% target. Recent reports show inflation falling to 1.7% in September, although a slight increase to 2.5% is expected by year-end.
Domestic inflationary pressures, although slowly declining, have prompted the MPC to monitor any signs of persistent inflation. This nuanced approach seeks to maintain restrictive policies just long enough to ensure inflation remains stable but flexible enough to adapt to economic changes.
Budget 2024: An Economic Stimulus
The recent Autumn Budget 2024 has introduced a substantial fiscal loosening, predicted to boost GDP by approximately 0.75% over the next year. Increased government spending, coupled with reforms in taxes like National Insurance and VAT on private school fees, is expected to invigorate demand.
However, these fiscal measures are also expected to temporarily raise inflation by up to 0.5% in the near term due to heightened consumption and business activities.
Global and Domestic Economic Conditions
The global economy continues to expand, although at a slightly slower pace than pre-COVID-19 levels. UK GDP growth slowed to an estimated 0.5% in Q2 2024, while a steady yet restrained growth rate is expected for the remainder of the year.
In the UK, the labour market shows signs of easing, albeit remaining relatively tight compared to historical standards. With unemployment stabilizing, private sector wage growth has moderated yet remains high by recent standards at 4.8%.
Looking Ahead: Projections and Uncertainty
According to the report, inflation is expected to hover around the 2.7% mark by the end of 2025, driven by the energy price outlook and global market conditions. GDP growth is projected to stabilize, supported by continued fiscal policies and gradual monetary easing.
However, uncertainties remain, particularly regarding how wage and price-setting behaviours might shift following the recent economic pressures.
In conclusion, the BoE’s recent rate cut aligns with its dual commitment to temper inflation while bolstering economic recovery, backed by fiscal support measures. The November Monetary Policy Report highlights a cautious yet optimistic outlook, emphasizing the need for vigilance amidst evolving global and domestic economic conditions.