The Bank of England keeps interest rates unchanged and significantly reduces its bond purchases.

Bank of England’s Monetary Policy Decision

In a close vote, the Monetary Policy Committee (MPC) of the Bank of England chose to maintain the Bank Rate at 5.25%, with a split vote of 5–4. However, there was a unanimous decision to reduce UK government bond purchases by £100 billion over the next year, bringing the total to £658 billion.

Economic Landscape

The Committee's August projections anticipated a return to the 2% inflation target by Q2 2025, driven by diminishing inflationary pressures domestically and externally. Despite this, inflation risks remained skewed to the upside, attributed to potential lasting impacts of external cost shocks on wages and prices.

Recent developments illustrate a mixed economic outlook: while global growth aligns with August's projections, regional disparities persist. UK GDP decreased by 0.5% in July, with indications pointing to marginal growth in Q3 2023. The labor market has eased slightly but remains historically tight, with an unemployment rate of 4.3% up to July. Notably, Average Weekly Earnings growth reached 8.1% in the three months leading to July, surpassing other pay growth indicators.

Inflation Dynamics

CPI inflation decreased from 7.9% in June to 6.7% in August, falling short of expectations and prompting discussions between the Governor and the Chancellor of the Exchequer. This decline is mainly attributed to reduced inflation in energy, food, and core goods prices. However, service price inflation is anticipated to remain high in the near term.

Short-Term Outlook

With a commitment to maintaining price stability, the MPC remains dedicated to the 2% inflation target, ensuring that deviations from the target are temporary and manageable. The current monetary stance is perceived as restrictive, given the significant increase in the Bank Rate during the tightening cycle's onset. The Committee emphasizes its vigilance toward potential persistent inflationary pressures and the overall economy's resilience. If these pressures prove enduring, further monetary tightening could be imminent.

Future Commitments

In line with its pledge from August 2022, the MPC will annually assess the reduction in the Asset Purchase Facility. Hence, the current decision aligns with this commitment by reducing UK government bond purchases over the ensuing year.