The highlights from the MPC statement are as follows:
- Inflation measured 4.2% in April and has fallen markedly from its peak two years ago.
- According to the CBI’s newly published forecast, inflation will remain close to 4% through the year-end and then start to ease towards the target.
- The inflation outlook remains highly uncertain, however, not least because of the recent global economic turmoil.
- Growth in domestic demand has subsided in line with a tight monetary stance. Capacity pressures in the economy have therefore eased steadily, as can be seen in the cooling of the housing and labour markets.
- Even so, economic activity still appears resilient, as is reflected, for instance, in recently published payment card turnover data.
- In addition, wage costs have continued to rise briskly, and while inflation expectations have fallen, they remain above target.
The MPC’s forward guidance takes a distinctly admonitory tone – much changed since March. It reads as follows:
Although inflation has eased and inflation expectations have fallen in the recent term, inflationary pressures remain. The conditions that would enable an easing of the real interest rate have therefore not yet emerged. Further interest rate cuts will depend on whether inflation moves closer to the Bank’s 2½% target. (our emphasis)
As before, near-term monetary policy formulation will be determined by developments in economic activity, inflation, and inflation expectations.
For the sake of comparison, the March statement read as follows:
Although inflation has eased and inflation expectations have fallen in the recent term, inflationary pressures remain, which calls for a continued tight monetary stance and caution regarding decisions going forward. This is compounded by significant global economic uncertainty.
As before, near-term monetary policy formulation will be determined by developments in economic activity, inflation, and inflation expectations.
As this shows, the MPC is determined that all else being equal, it will only lower interest rates in coming quarters to the extent that inflation declines. It is uncommon that forward guidance expressed this strongly is accompanied by a rate cut.
Weaker growth, higher inflation
The CBI’s new macroeconomic forecast, published concurrent with the interest rate decision, is somewhat more pessimistic about GDP growth and inflation than the previous forecast, released in early February. The CBI projects GDP growth at 1.0% in 2025, 2.5% in 2026, and 2.7% in 2027. It should be borne in mind, though, that year-2024 GDP growth turned out nearly a percentage point stronger in real terms than the CBI had projected in February, and that economic activity in 2025 is therefore about the same in the new forecast as in the previous one.