The Bank of England’s Most Difficult Decision in a Decade

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.

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The Inflation Picture

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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%.

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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.

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The Growth Question

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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.

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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.

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What the Committee Will Do

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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.

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