According to the MPC statement explaining the rationale for the decision, the outlook for 2022 is for more robust GDP growth than was previously assumed, not least because of stronger private consumption and a more rapid rebound in the tourism industry. The slack in the labour market had narrowed steadily, and a larger positive output gap had developed than the CBI had forecast in May.
The inflation outlook had continued to cloud over, reflecting stronger economic activity than was forecast in May, as well as more persistent house price inflation and higher global inflation. Furthermore, inflation expectations had continued to rise by most measures.
The forward guidance in the MPC statement is unchanged since June, with the same stern tone regarding the quarters to come. It reads as follows:
The MPC considers it likely that the monetary stance will have to be tightened even further so as to ensure that inflation eases back to target within an acceptable time frame. Near-term monetary policy decisions will depend on developments in economic activity, inflation, and inflation expectations. Decisions taken at the corporate level, in the labour market, and in public sector finances will be a major determinant of how high interest rates must rise.
The economic outlook is relatively favourable …
As is noted above, the CBI now expects stronger GDP growth in 2022 than it did in its last macroeconomic forecast, issued in May. On the other hand, it also expects somewhat weaker growth in 2023 and 2024, not least because the global economic outlook has deteriorated. The CBI projects GDP growth at 5.9% in 2022, 1.9% in 2023, and 2.3% in 2024. The bank assumes, as we have, that growth will be increasingly driven by exports, and furthermore, that the contribution from consumption and investment will be much smaller in coming years than it was in 2022 – and 2021 as well, actually.