The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 22 June 2021, the Committee judged that the existing stance of monetary policy remained appropriate. The MPC voted unanimously to maintain Bank Rate at 0.1%. The Committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20 billion. The Committee voted by a majority of 8-1 for the Bank of England to continue with its existing program of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at £875 billion and so the total target stock of asset purchases at £895 billion.
In the MPC’s central projection in the May Monetary Policy Report, UK GDP was expected to recover strongly over 2021, to pre-Covid-19 (Covid) levels. Spare capacity in the economy was expected to be eliminated as activity picked up, and there was expected to be a temporary period of excess demand, before demand and supply returned broadly to balance. CPI inflation was projected to rise temporarily above the 2% target, owing mainly to developments in energy prices. As these transitory effects faded, conditioned on the market path for interest rates, inflation was expected to return to around 2% in the medium term.
Since May, developments in global GDP growth have been somewhat stronger than anticipated, particularly in advanced economies. Global price pressures have picked up further, reflecting strong demand for goods, rising commodity prices, supply-side constraints and transportation bottlenecks, and these have started to become apparent in consumer price inflation in some advanced economies. Financial market measures of inflation expectations suggest that the near-term strength in inflation is expected to be transitory.
Bank staff have revised up their expectations for the level of UK GDP in 2021 Q2 by around 1½% since the May Report, as restrictions on economic activity have eased, so that output in June is expected to be around 2½% below its pre-Covid 2019 Q4 level. This recovery in activity has been most pronounced in the consumer-facing services for which restrictions were loosened in April. Output in a number of sectors is now around pre-Covid levels, although it remains materially below in others. The housing market remains strong, and indicators of consumer confidence have increased. The direct economic implications of the delays in the final stages of the relaxation of Covid restrictions are likely to be relatively small compared with the impact of previous stages.
The LFS unemployment rate fell slightly to 4.7% in the three months to April, although it is likely that labour market slack has remained higher than implied by this measure. Some individuals stopped looking for work during the pandemic, and were therefore recorded as inactive. There is uncertainty around how many of these individuals will resume their search for a job, and when. The number of furloughed jobs has declined faster than expected, as demand has recovered. Overall, there is judged to be spare capacity in aggregate in the economy at present. However, vacancies have risen above pre-Covid levels, and there are increasing signs of recruitment difficulties for some businesses, and in some locations and sectors.
Private sector regular pay in the three months to April was 5.6% higher than a year earlier. Measured pay growth continues to be boosted by compositional effects, given that job losses have been skewed towards lower-paid employees during the pandemic. In addition, the base effect of the drop in pay in spring and summer 2020 will continue to distort the annual comparison, such that, even if the level of private sector regular pay were to remain unchanged in May and June, twelve-month pay growth would still rise to close to 8% in the second quarter. Underlying pay growth appears to be around pre-Covid rates.
Twelve-month CPI inflation rose from 1.5% in April to 2.1% in May, above the MPC’s 2% target and 0.3 percentage points higher than expected in the May Report. Core CPI inflation has also risen from 1.3% to 2.0%. Building global input cost pressures have increasingly been passed through into manufacturing output prices and non-oil import prices. CPI inflation is expected to pick up further above the target, owing primarily to developments in energy and other commodity prices, and is likely to exceed 3% for a temporary period.
The Committee’s expectation is that the direct impact of rises in commodity prices on CPI inflation will be transitory. More generally, the Committee’s central expectation is that the economy will experience a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation will fall back. There are two-sided risks around this central path, and it is possible that near-term upward pressure on prices could prove somewhat larger than expected. Taking together the evidence from financial market measures and surveys of households, businesses and professional forecasters, the Committee judges that UK inflation expectations remain well anchored.
In judging the appropriate stance of monetary policy, the Committee will, consistent with its policy guidance and as always, focus on the medium-term prospects for inflation, including the balance between demand and supply, and medium-term inflation expectations, rather than factors that are likely to be transient.
The MPC will continue to monitor the situation closely and will take whatever action is necessary to achieve its remit. The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.
The Committee will have the opportunity to assess the economic outlook more fully in the context of its August Monetary Policy Report and accompanying economic projections.
At this meeting, the Committee judged that the existing stance of monetary policy remained appropriate.