Since the MPC’s previous forecast, there have been significant developments in fiscal policy. Uncertainty around the outlook for UK retail energy prices has fallen to some extent following further government interventions. For the current November forecast, and consistent with the government’s announcements on October 17, the MPC’s working assumption is that some fiscal support continues beyond the current six-month period of the Energy Price Guarantee (EPG), generating a stylised path for household energy prices over the next two years. Such support would mechanically limit further increases in the energy component of CPI inflation significantly and reduce its volatility. However, in boosting aggregate private demand relative to the August projections, the support could augment inflationary pressures in non-energy goods and services, the Bank of England said in a statement.
After the US Federal Reserve, the Bank of England has increased the bank rate by 0.75 percentage points to 3 per cent to curb inflation. The Bank’s Monetary Policy Committee (MPC) that sets monetary policy to meet the 2 per cent inflation target, and in a way that helps to sustain growth and employment, voted by a majority of 7-2 to increase the rate.
There have been large moves in UK asset prices since the August Report. These partly reflect global developments, although UK-specific factors have played a very significant role during this period. The MPC’s projections are conditioned on the path of Bank Rate implied by financial markets in the seven working days leading up to October 25. That path rose to a peak of around 5.25 per cent in 2023 Q3, before falling back. Overall, the path is around 2.25 percentage points higher over the next three years than in the August projection. The higher market yield curve has pushed new mortgage rates up sharply. Financial conditions have tightened materially, pushing down on activity over the forecast period, the MPC said.
GDP is expected to decline by around 0.75 per cent during 2022 H2, in part reflecting the squeeze on real incomes from higher global energy and tradable goods prices. CPI inflation was 10.1 per cent in September and is projected to pick up to around 11 per cent in 2022 Q4, lower than was expected in August, reflecting the impact of the EPG.
In the MPC’s November central projection that is conditioned on the elevated path of market interest rates, GDP is projected to continue to fall throughout 2023 and 2024 H1, as high energy prices and materially tighter financial conditions weigh on spending. Four-quarter GDP growth picks up to around 0.75 per cent by the end of the projection.
In the MPC’s central projection, CPI inflation starts to fall back from early next year as previous increases in energy prices drop out of the annual comparison. Domestic inflationary pressures remain strong in coming quarters and then subside. CPI inflation is projected to fall sharply to some way below the 2 per cent target in two years’ time, and further below the target in three years’ time.
Fibre2Fashion News Desk (KD)