The Bank of England's Monetary Policy Committee meets this week against a backdrop of unusual uncertainty. The economic data is sending contradictory signals, and the committee's usual frameworks are providing less guidance than usual.
The Inflation Picture
Headline CPI has fallen to 2.3%, marginally above the 2% target. Services inflation, which the Bank watches most closely as a guide to domestically-generated price pressure, remains stickier at 4.1%.
Wage growth, at 4.8%, continues to run ahead of the rate consistent with 2% inflation over the medium term. But the relationship between wages and prices has become less stable since the pandemic, and the Bank's models are working with calibrations built on a different world.
The Growth Question
GDP growth in Q1 was essentially flat. The economy is not in recession, but nor is it growing at a rate that would justify confidence about its underlying health.
Consumer spending remains subdued. Businesses are investing cautiously. The housing market is showing early signs of recovery, but starting from a low base after the rate-shock of 2022-23.
What the Committee Will Do
The consensus among City economists is that a cut in August remains the most likely outcome, with a further cut in November completing a gradual easing cycle. But the committee's recent communications suggest a level of internal disagreement that makes forecasting its decisions harder than usual.
