Monetary Policy Report – February 2024

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 31 January 2024, the MPC voted by a majority of 6–3 to maintain Bank Rate at 5.25%. Two members preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%.

The Committee’s updated projections for activity and inflation are set out in the accompanying February Monetary Policy Report. These are conditioned on a market-implied path for Bank Rate that declines from 5¼% to around 3¼% by the end of the forecast period, almost 1 percentage point lower on average than in the November Report.

Since the MPC’s previous meeting, global GDP growth has remained subdued, although activity continues to be stronger in the United States. Inflationary pressures are abating across the euro area and United States. Wholesale energy prices have fallen significantly. Material risks remain from developments in the Middle East and from disruption to shipping through the Red Sea.

Following recent weakness, GDP growth is expected to pick up gradually during the forecast period, in large part reflecting a waning drag on the rate of growth from past increases in Bank Rate. Business surveys are consistent with an improving outlook for activity in the near term.

The labour market has continued to ease, but remains tight by historical standards. In the February Report projections, the continuing relative weakness of demand, despite subdued supply growth by historical standards, leads a margin of economic slack to emerge during the first half of the forecast period. Unemployment is expected to rise somewhat further.

Twelve-month CPI inflation fell to 4.0% in December 2023, below expectations in the November Report. This downside news has been broad-based, reflecting lower fuel, core goods and services price inflation. Although still elevated, wage growth has eased across a number of measures and is projected to decline further in coming quarters.

CPI inflation is projected to fall temporarily to the 2% target in 2024 Q2 before increasing again in Q3 and Q4. This profile of inflation over the second half of the year is accounted for by developments in the direct energy price contribution to 12-month inflation, which becomes less negative. In the MPC’s latest most likely, or modal, projection conditioned on the lower market-implied path for Bank Rate, CPI inflation is around 2¾% by the end of this year. It then remains above target over nearly all of the remainder of the forecast period. This reflects the persistence of domestic inflationary pressures, despite an increasing degree of slack in the economy. CPI inflation is projected to be 2.3% in two years’ time and 1.9% in three years.

The Committee judges that the risks around its modal CPI inflation projection are skewed to the upside over the first half of the forecast period, stemming from geopolitical factors. It now judges that the risks from domestic price and wage pressures are more evenly balanced, meaning that, unlike in previous forecasts, there is no difference between the MPC’s modal and mean projections at the two and three-year horizons.

Conditioned on the alternative assumption of constant interest rates at 5.25%, the path for CPI inflation is significantly lower than in the Committee’s modal projection conditioned on the declining path of market rates, falling below the 2% target from 2025 Q4 onwards.

The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. Monetary policy will ensure that CPI inflation returns to the 2% target sustainably in the medium term.

At this meeting, the Committee voted to maintain Bank Rate at 5.25%. Headline CPI inflation has fallen back relatively sharply. The restrictive stance of monetary policy is weighing on activity in the real economy and is leading to a looser labour market. In the Committee’s February forecast, the risks to inflation are more balanced. Although services price inflation and wage growth have fallen by somewhat more than expected, key indicators of inflation persistence remain elevated.

As a result, monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.

The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably. It will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level.

1.1: The conditioning assumptions underlying the MPC’s projections

As set out in Table 1.B, the MPC’s February projections are conditioned on:

• The lower paths for policy rates in advanced economies implied by financial markets, as captured in the 15-working day averages of forward interest rates to 23 January (Chart 2.5). The market-implied path for Bank Rate in the United Kingdom has fallen by almost 1 percentage point on average over the next three years compared with the equivalent period at the time of the November Report. The path for Bank Rate underpinning the February projections declines from 5¼% to around 3¼% by the end of the forecast period.
• A path for the sterling effective exchange rate index that is over 2% higher on average than in the November Report. The exchange rate depreciates slightly over the forecast period, reflecting the role for expected interest rate differentials in the Committee’s conditioning assumption.
• Wholesale energy prices that follow their respective futures curves over the forecast period. Since November, oil and gas prices have declined materially (Chart 2.3), despite the recent disruptions to shipping in the Red Sea. Significant uncertainty remains around the outlook for wholesale energy prices, including related to recent geopolitical developments (Key judgement 3).
• UK household energy prices that move in line with Bank staff estimates of the Ofgem price cap implied by the path of wholesale energy prices (Section 2.3).
• Fiscal policy that evolves in line with announced UK government policies to date. As discussed in Box A, additional fiscal measures were announced in the Autumn Statement, including a two pence cut in the main rate of employee National Insurance contributions, a permanent 100% capital allowance for qualifying business investment, and a package of reforms to welfare and health services designed to increase labour market participation.
• The variant of the ONS’s 2020-based population projections, published in January 2023, which reflects international migration to the year ending June 2022 (Section 3).

1.2: Key judgements and risks

1.2: Key judgement 1

Following recent weakness, GDP growth is expected to pick up gradually during the forecast period. That in large part reflects a waning drag on the rate of growth from past increases in Bank Rate.

UK GDP is expected to have been flat in 2023 Q4. Combined with downward revisions to previous quarters, the level of GDP starts the forecast period around ½% lower than expected at the time of the November Report. Market sector output, which is less subject to swings in measured non-market output such as in the health and education sectors, is now expected to have declined by around ¼% in both 2023 Q3 and Q4. Private final domestic demand including household consumption has also been weak (Section 2.2).

GDP is projected to increase by 0.1% in 2024 Q1 and at a similar pace over the following few quarters, slightly stronger rates than expected in the November Report. Business surveys, such as the S&P Global/CIPS UK composite PMI, suggest that private sector activity has stabilised and may be edging up again.

Based on the average relationships over the past between Bank Rate, other financial instruments and economic activity, and taking account of recent declines in market interest rates, Bank staff estimate that around two thirds of the peak domestic impact of higher interest rates on the level of GDP has come through. There remains significant uncertainty around that estimate, however. In particular, recent developments suggest that house prices have held up to a greater extent than might otherwise have been expected (Chart 2.11), and that the collateral and precautionary savings channels of monetary policy through which house prices affect consumer spending could be somewhat weaker than expected over coming quarters.

Taken together, the pass-through of past rises in interest rates and the latest market-implied interest rate path on which the forecast is conditioned (Section 1.1) continue to push down on the level of GDP over the first half of the forecast period in absolute terms. There is nevertheless a waning drag on the rate of GDP growth from monetary policy. Compared with the November projection, the fall in the market path over recent months pushes up on GDP materially throughout this forecast, all else equal.

As discussed in Box A, the combined effect of the policies announced in the Autumn Statement is expected to boost the level of aggregate demand by around 0.2% in fiscal years 2024–25 and 2025–26, and by around 0.3% in 2026–27, relative to the November Report projections. As these measures are also likely to boost potential supply to some extent, including through higher labour market participation, the implications for the MPC’s output gap projection (Key judgement 2), and hence inflationary pressures in the economy, are projected to be smaller.

After taking account of all announced government plans, the positive impacts on the level of GDP of past fiscal loosening measures, including those related to the pandemic and the energy price shock, continue to unwind. This pulls down on the Committee’s GDP growth projection during the forecast period. Measured real government consumption is nevertheless expected to grow quite strongly in 2024, by 4%, before growth slows over the forecast period.

International GDP growth has continued to be subdued (Section 2.1). The path of global GDP is expected to be slightly higher than in the November Report over much of the forecast period, in part reflecting looser global financial conditions. In the MPC’s February projection, annual UK-weighted world GDP growth is projected to rise in the medium term, to slightly below its average rate in the decade prior to the pandemic (Table 1.D).

Growth among advanced economies diverged in 2023, with significantly stronger growth in the United States than in the euro area. In light of recent developments, Bank staff have revised up their view of the supply potential of the US economy, reflecting a higher projected population, and higher structural labour participation and productivity assumptions. Alongside other factors, this pushes up on the US GDP growth projection relative to the November Report. Bank staff judge that euro-area supply growth will remain more subdued than in the United States and grow at a similar pace over the forecast period to UK supply growth (Key judgement 2).

Overall, in the Committee’s February projection, UK GDP growth is projected to pick up gradually during the forecast period. That in large part reflects a waning drag on the rate of growth from past increases in Bank Rate. The impact of fiscal policy and relatively weak potential supply growth (Key judgement 2) pull down on GDP growth throughout the forecast period relative to historical averages. Four-quarter GDP growth recovers to 1½% by the end of the forecast period (Chart 1.2). Relative to the November Report projection, and despite a weaker starting point for activity, the level of GDP has been revised up by just under ¾% by the end of the forecast period, more than accounted for by the boost to activity from the recent lower path of market interest rates on which the forecast is conditioned.

Within the key domestic expenditure components underpinning the February GDP projection conditioned on market interest rates (Table 1.D), household spending is expected to decline by ¼% this year, although this reflects the effect on the annual average of declines in consumption in 2023. The level of household spending is expected to be flat in 2024 H1 and to pick up over the remainder of the forecast period. Taking account of all components of household income, the saving ratio is expected to remain elevated this year before falling back over the remainder of the forecast period. In large part reflecting the transmission of higher interest rates, housing investment is expected to continue to fall in the near term (Section 2.2), before picking up slightly over the remainder of the forecast period. Business investment is projected to be flat over the first half of the forecast period, but to pick up slightly thereafter (Section 3). Weakness in near-term private final domestic demand growth is expected to be offset by strong real government consumption growth.

Chart 1.2: GDP growth projection based on market interest rate expectations, other policy measures as announced

Footnotes

• The fan chart depicts the probability of various outcomes for GDP growth. It has been conditioned on Bank Rate following a path implied by market yields, but allows the Committee’s judgement on the risks around the other conditioning assumptions set out in Section 1.1, including wholesale energy prices, to affect the calibration of the fan chart skew. To the left of the shaded area, the distribution reflects uncertainty around revisions to the data over the past. To the right of the shaded area, the distribution reflects uncertainty over the evolution of GDP growth in the future. If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective judgement is that the mature estimate of GDP growth would lie within the darkest central band on only 30 of those occasions. The fan chart is constructed so that outturns are also expected to lie within each pair of the lighter aqua areas on 30 occasions. In any particular quarter of the forecast period, GDP growth is therefore expected to lie somewhere within the fan on 90 out of 100 occasions. And on the remaining 10 out of 100 occasions GDP growth can fall anywhere outside the aqua area of the fan chart. Over the forecast period, this has been depicted by the grey background. See the Box on page 39 of the November 2007 Inflation Report for a fuller description of the fan chart and what it represents. The y-axis of the chart has been truncated to illustrate more clearly the current uncertainty around the path of GDP growth, as otherwise this would be obscured by the volatility of GDP growth during the pandemic.

In the GDP projection conditioned on the alternative assumption of constant interest rates at 5.25% over the forecast period, growth is significantly weaker over the forecast period compared with the MPC’s projection conditioned on the declining path of market-implied rates.

The risks around the projection for UK GDP growth are judged to be broadly balanced.

There are risks in both directions around the central projections for domestic spending and GDP, including those related to the transmission of monetary policy. In particular, there is uncertainty around the collateral and precautionary savings channels through which house prices affect consumer spending, and around the extent to which the full effects of interest rates on business investment have already come through. The Committee will continue to monitor closely the impact of the significant increase in Bank Rate. It will also continue to keep under review the relationship between Bank Rate and economic activity, including how it may have changed during the current tightening cycle.

Internationally, the risk of higher commodity prices and disruption to trade flows could lead to weaker economic activity as well as greater external inflationary pressures (Key judgement 3).

1.2: Key judgement 2

Excess demand in the UK economy is judged to have diminished significantly over recent quarters. Potential supply growth is expected to remain relatively subdued by historical standards, but the continuing relative weakness of demand leads a margin of economic slack to emerge during the first half of the forecast period. Unemployment is expected to rise somewhat further.

Potential supply determines the level of output the economy can sustain without generating excessive inflationary pressures. Since the previous Report, the Committee has concluded its supply stocktake (Section 3), which has fed into the construction of its latest projections.

The Committee has reviewed its assessment of the past and current degree of economic slack. Taking a steer from a number of estimates, which take some signal from the strength of underlying inflationary pressures, the MPC judges that the degree of excess demand has been a little higher over the previous couple of years than was assumed in the November Report. As the level of actual output has also been lower than expected in November, this implies that potential supply has been even weaker.

In absolute terms, the margin of excess demand is now judged to have peaked at around 1¾% of potential GDP at the start of 2022, before declining steadily to around zero over the past two years. That period of excess demand has been accounted for by the tightness of the labour market and, initially, by a higher than normal degree of capacity utilisation within companies following the pandemic. Over the past year, businesses have responded to the weakness in demand by retaining their existing employees, while using them less intensively.

The MPC is continuing to consider the collective steer from a wide range of data to inform its view on labour market developments. As discussed in Box B in the November 2023 Report, there are increased uncertainties around the ONS’s official labour market activity data that have previously been based on the Labour Force Survey.

Alongside weakness in output, a range of indicators suggest that employment growth is likely to have slowed around the turn of the year but not turned negative (Chart 2.12). The ONS’s alternative experimental statistic for the unemployment rate has remained flat at 4.2% in the three months to November, having increased by 0.7 percentage points from its trough in 2022. And there has been other evidence of a loosening in the labour market, although it remains tight by historical standards.

As discussed in the November Report, the medium-term equilibrium rate of unemployment is judged to be around 4½% currently. Following a review during this supply stocktake, and despite some evidence of a decline over recent years in the efficiency with which vacancies are matched to those seeking work, the MPC continues to judge that the long-term equilibrium rate of unemployment, which the medium-term rate should converge back to over time, is just above 4%.

The MPC judged at the time of its previous stocktake that a constellation of major economic shocks was already weighing materially on the level of estimated potential supply and would continue to weigh on it over the forecast period (Key judgement 1 in the February 2023 Report). Since then, the MPC judges that the supply impacts from the change in the UK’s trading relationship with the EU are evolving broadly as expected (Section 3). But, alongside recent declines in commodity prices, new analysis of energy-intensive industries suggests that the risks of a persistent hit to supply from the global energy price shock have reduced. And the latest available data suggest that the Covid-related drag on potential participation may be unwinding faster than anticipated, while the lasting effects of the pandemic on potential productivity are also likely to be smaller than previously assumed.

Overall, in the MPC’s latest forecast conditioned on the ONS’s 2020-based population projections (Section 1.1), potential supply growth is expected to pick up to around 1¼% per year in 2025 and 2026 (Chart 3.1). This is somewhat weaker than the average growth rate in the decade before the pandemic and much lower than in the decade prior to the global financial crisis (GFC). But it is stronger than the projection for supply growth at the time of the previous stocktake in February 2023 and slightly above the projection in the November Report.

In the Committee’s latest projection, growth in potential productivity in 2025 and 2026 is expected to be around ¾% (Chart 3.5), slightly stronger than the average growth rate in the decade before the pandemic but much lower than in the decade prior to the GFC. Despite the adverse impact of long-running demographic trends such as an ageing population, projected potential labour supply growth is expected to increase by around ½% per year over the forecast period, accounted for primarily by population growth.

Although potential supply growth is expected to be relatively subdued, particularly in the near term, the outlook for demand is weaker, leading to a margin of economic slack emerging in the Committee’s latest projections during the first half of the forecast period. Aggregate excess supply is expected to remain around 1% of potential GDP towards the end of the forecast period (Table 1.A), compared with around 1½% of GDP in the November Report. Relative to November, the projection for excess demand/supply has been pushed up by the boost to demand from the lower market path of interest rates, which more than offsets somewhat stronger expected potential supply growth.

In the MPC’s latest projection, the unemployment rate is projected to continue to rise gradually over much of the forecast period such that it exceeds the assumed medium-term equilibrium rate by the end of this year. The unemployment rate reaches around 5% by the end of the forecast period (Chart 1.3). This is a slightly lower path for unemployment than in the November Report.

Chart 1.3: Unemployment rate projection based on market interest rate expectations, other policy measures as announced

Footnotes

• The fan chart depicts the probability of various future outcomes for the ILO definition of unemployment and begins in 2023 Q4. It has been conditioned on Bank Rate following a path implied by market yields, but allows the Committee’s judgement on the risks around the other conditioning assumptions set out in Section 1.1, including wholesale energy prices, to affect the calibration of the fan chart skew. The coloured bands have the same interpretation as in Chart 1.2 and portray 90% of the probability distribution. Up to June 2023, this fan chart is based on LFS unemployment data. Beyond this point, the Committee is drawing on the collective steer from other indicators of unemployment to inform its projection (see Box B in the November 2023 Report). A significant proportion of this distribution lies below Bank staff’s current estimate of the long-term equilibrium unemployment rate. There is therefore uncertainty about the precise calibration of this fan chart.

In projections conditioned on the alternative assumption of constant interest rates at 5.25% over the forecast period, the unemployment rate rises to a significantly greater extent compared with the MPC’s projection conditioned on market rates.

There are risks in both directions around the projection for potential supply growth.

As discussed in Section 3, updated ONS population estimates and projections, which are yet to be incorporated in the MPC’s forecasts, imply a higher rate of recent and future labour supply growth. On 30 January, the ONS released an update showing a stronger profile for population growth than in its previous 2020-based projections. These updated population projections were not available in time to be reflected in the Committee’s latest supply-side assessment, but all else equal they may suggest a somewhat higher path of labour supply and potential output growth in the future. However, a higher future path for the population would generally have similar impacts on both supply and demand, and thus only a limited impact on inflationary pressure. For a given level of measured GDP, a larger working age population over the recent past also implies weaker labour productivity, and so could imply downside risks around future productivity growth all else equal.

There are other possible risks around the MPC’s projection for potential productivity and supply growth, which remain somewhat weaker than other external forecasters including the Office for Budget Responsibility, even after allowing for differences in population conditioning assumptions. Productivity growth could nevertheless be weaker than the Committee expects if, for example, there were to be fewer insolvencies of lower-productivity companies. As discussed in Section 3, innovations in artificial intelligence technologies are likely to bring about changes in the way some sectors operate, but the speed of take-up and implications for productivity are uncertain. If future supply growth is stronger than expected for this reason, the boost to expected incomes would also be likely to raise demand and, similar to the risks around population growth, the impact on the Committee’s inflation projection would be limited.

There remains significant uncertainty around the Committee’s assumptions for the paths of the medium and long-term equilibrium rates of unemployment, news in which would, holding demand fixed, have implications for labour market tightness and inflationary pressures.

1.2: Key judgement 3

The Committee continues to expect second-round effects in domestic prices and wages to take longer to unwind than they did to emerge. In the near term, CPI inflation falls more quickly than projected previously, partly reflecting lower energy prices. But, conditioned on the lower path of market interest rates, inflation then increases and remains above the 2% target over nearly all of the remainder of the forecast period, despite an increasing degree of slack in the economy.

Twelve-month CPI inflation remains above the MPC’s 2% target, but has fallen back to 4.2% in 2023 Q4 and was 4.0% in December, below expectations in the November Report. The downside news since the previous Report has been broad based, reflecting lower fuel, core goods and services inflation (Section 2.3).

CPI inflation is now projected to fall temporarily to the 2% target in 2024 Q2 before increasing slightly again in Q3 and in Q4. This profile of inflation over the second half of the year is accounted for by developments in the direct energy price contribution to 12-month inflation. Based on the latest paths of oil and gas futures prices, the direct energy contribution is lower during the first year of the forecast period than in the Committee’s previous forecast. But, in absolute terms, the direct energy contribution to CPI inflation becomes somewhat less negative in 2024 Q3 and Q4 compared with Q2 (Chart 1.1). CPI inflation excluding energy is projected to remain above the target throughout the second half of this year, and by more than headline inflation, at around 3%.

In the near term, inflation in prices of UK core consumer goods, and food and non-alcoholic beverages, are projected to continue to fall back, to just over zero by the middle of this year.

Four-quarter UK-weighted world export price inflation, excluding the direct effect of oil prices, is estimated to have been negative at the end of last year, but is now expected to pick up more quickly and be positive at the start of this year. This reflects recent strength in euro-area export price data, which is only partially offset by a weaker forecast for export prices in China. Over the forecast period, the recent appreciation of the sterling exchange rate and its assumed path (Section 1.1) will, however, put downward pressure on UK import price inflation, and over time on CPI inflation, relative to the November Report. Import prices are projected to fall by 1¾% in 2024, a smaller fall than expected in the November Report, but rise by ¾% in 2025 (Table 1.D).

The MPC is continuing to monitor closely indications of persistent inflationary pressures and resilience in the UK economy as a whole, including a range of measures of the underlying tightness of labour market conditions (Key judgement 2), wage growth and services price inflation.

Services CPI inflation has remained significantly elevated but has fallen back somewhat more quickly than expected. Median services inflation, which is less sensitive to changes in the inflation rate of individual services, has also started to decline in recent months (Chart 2.19). Services price inflation is expected to continue to ease over the course of this year, albeit more slowly than other components of the CPI basket.

Annual private sector regular AWE growth declined to 6.5% in the three months to November, around 1 percentage point below the expectation in the November Report. This has brought the AWE measure back into line with the steer from other indicators of annual pay growth, which lies between 6% and 7% (Chart 2.15).

Recent outturns in wage growth have also continued to be stronger than standard models of wage growth, based on productivity, short-term inflation expectations and a measure of economic slack, would have predicted (Chart 1.4). The MPC continues to judge that private sector regular AWE growth will ease more slowly than the range of forecasts from this suite of models would predict, consistent with its broader judgement that second-round effects in both domestic prices and wages will take longer to unwind than they did to emerge.

Overall, the near-term outlook for pay growth is weaker than projected in the November Report, with the annual growth rate of private sector regular AWE projected to decline to around 4¾% by 2024 Q2 and to end this year at a similar rate. However, this profile also reflects an MPC judgement to push up slightly on pay growth in the near term, in light of the stronger forward-looking indications from the Bank’s Agents pay settlements survey (Box D) and from the Decision Maker Panel Survey.

In the MPC’s February projection, private sector regular AWE growth falls to around 3% by the end of the forecast period (Chart 1.4), as short-term inflation expectations are assumed to fall back and a margin of spare capacity is expected to open up in the labour market in the medium term (Key judgement 2). This is a similar medium-term profile for AWE growth compared to the November Report. Private sector regular pay-based unit wage cost growth is expected to fall back to 3¼% in 2024 and to 2% in 2025 (Table 1.D).

In the modal projection conditioned on the alternative assumption of constant interest rates at 5.25% over the forecast period, CPI inflation is expected to be around the 2% target during the first half of the forecast period before falling below it from 2025 Q4 onwards (Chart 1.6). This path is significantly lower than the Committee’s modal projection conditioned on market rates.

Chart 1.6: CPI inflation projection based on constant interest rates at 5.25%, other policy measures as announced

Footnotes

• This fan chart depicts the probability of various outcomes for CPI inflation in the future, conditioned on the assumptions in Table 1.B, apart from for Bank Rate, with this chart conditioned on constant interest rates at 5.25%. The fan chart has the same interpretation as Chart 1.5.

The risks around the modal CPI inflation projection from domestic price and wage pressures are now judged to be more evenly balanced, but there are some upside risks to the modal projection from geopolitical factors over the first half of the forecast period.

In the medium term, there also remain risks around the judgement that second-round effects in domestic prices and wages take longer to unwind than they did to emerge. But, in light of recent developments, and on the basis that there are no further significant shocks to the economy, these risks are now judged to be more evenly balanced following an extended period in which they were skewed to the upside.

The pace at which CPI inflation falls back to the 2% target will also depend on inflation expectations. Since the November Report, indicators of household, business and financial market inflation expectations have continued to ease (Section 2.4). The Committee will continue to monitor measures of inflation expectations very closely and act to ensure that longer-term inflation expectations are anchored at the 2% target.

Overall, the Committee judges that the risks around the modal projection for CPI inflation are skewed to the upside over the first half of the forecast period, reflecting geopolitical factors, but that the risks are now balanced in the medium term such that there are no differences between the MPC’s modal and mean projections at the year two and three horizons (Table 1.A).

2.1: Global developments and monetary and financial conditions

Global GDP growth remains subdued…

Global growth was subdued over the course of 2023. UK-weighted world GDP is expected to have grown by around 0.4% in 2023 Q4, broadly in line with the projection in the November Report. Four-quarter growth in Q4 is expected to have been around 1.6%, below its 2010–19 average of 2.4% (Chart 2.2). The latest indicators, such as purchasing managers’ indices (PMIs), suggest that global GDP is likely to rise at a similar pace in 2024 Q1 as in recent quarters.

…but with significant regional differences.

Growth among advanced economies has diverged in 2023, with significantly stronger growth in the United States than in the euro area.

In the euro area, GDP was flat in 2023 Q4, following little growth in the preceding three quarters. Near-term indicators such as the S&P Global/HCOB services and manufacturing PMIs have stabilised, though at levels indicating a contraction in activity. Industrial production has remained weak. Euro-area growth is projected to remain relatively subdued over the course of 2024, as the boost from lower energy prices is broadly offset by tighter fiscal policy. Monetary policy is also expected to drag on euro-area growth, though to a lesser extent than in the November Report given lower market expectations of future policy rates.

In contrast, US quarterly GDP growth was 0.8% in 2023 Q4, in line with average growth between 2023 Q1 and Q3. Some of the strength in US GDP growth appears to have been associated with higher supply growth, with upside news in net migration, labour force participation and productivity over the course of the year. However, the ISM services PMI has weakened in recent months, while the ISM manufacturing PMI was in contractionary territory throughout 2023. US GDP growth is expected to soften in 2024, in part accounted for by tighter fiscal policy and the depletion of pandemic savings. Nevertheless, US growth is expected to be stronger than projected in the November Report owing to higher supply growth and a loosening in financial conditions.

In China, quarterly GDP growth slowed to 1% in 2023 Q4. The Chinese property sector has weakened further, with declines in both house prices and transaction volumes. However, the growth outlook over 2024 has improved somewhat since the November Report on the back of the announced loosening of fiscal policy. Annual consumer price inflation in China has turned negative in recent months, partly accounted for by lower food price inflation.

Global energy prices have fallen materially since November…

Since the November Report, the Brent spot oil price has fallen by around 15% (Chart 2.3), owing to a combination of slowing global demand, supply increases from non-OPEC countries, and less binding OPEC supply cuts than had been anticipated. European gas futures prices for 2024 have fallen by around 40% since the November Report. European gas storage is almost full, as relatively warm weather at the end of 2023 curbed demand expectations and supply was boosted by a reopening of Israel’s production capacity.

… but disruption in the Red Sea poses risks to both energy and export prices.

Global export prices have eased markedly over the past year, but there are upside risks looking ahead. The easing reflects the indirect effects of lower energy prices, the clearing of supply-chain bottlenecks and weak producer price inflation. That said, global export prices have surprised to the upside somewhat in the recent data. Disruption to shipping in the Red Sea (Chart 2.4) is also expected to push up on export prices and weigh on global trade volumes in early 2024. A further escalation of recent disruption could lead to larger and more prolonged effects, including on energy prices (Section 1).

Consumer price inflation is declining across advanced economies.

Consumer price inflation in the euro area and US has declined more quickly than expected at the time of the November Report, with downside news stemming both from lower wholesale energy prices and a faster-than-expected moderation in core inflation. Euro-area headline HICP inflation stood at 2.9% in December, with core inflation easing to 3.4%. In the US, headline PCE inflation fell to 2.6% in December, with core PCE inflation declining to 2.9%.

Declines in core consumer price inflation have been accounted for by lower core goods price inflation, reflecting improvements in global supply conditions and the indirect effects of lower energy prices. US annual core goods inflation started to fall in the middle of 2022 and has been close to zero since August 2023, while euro-area core goods inflation peaked in early 2023 and has since fallen back to 2.5% (Chart 2.5). In contrast, core goods inflation in the UK only started to fall back from the middle of 2023 and stood at 3.1% in December.

Services consumer price inflation rates, which have a larger domestically driven component, have slowed more modestly, in part reflecting developments in pay growth. Services inflation has declined to around 4% in both the US and the euro area, while UK services inflation currently stands above 6% (Chart 2.5). To the extent that they are broadly comparable, measures of wage inflation have also been higher in the UK than elsewhere. US average hourly earnings increased by 4% in the 12 months to December, while euro-area compensation per employee increased by 5.2% in 2023 Q3 and UK whole-economy AWE by 6.5% for the three months to November. That said, there were signs of easing in all three economies.

Global consumer price inflation rates are expected to moderate further in the near term. US headline PCE inflation is expected to fall to around 2% at the end of 2024 Q1, driven mainly by lower services inflation. Euro-area headline inflation is expected to fall to around 2% later this year, driven by falling energy prices as well as a continuing moderation in core goods and services inflation. However, significant risks to the global inflation outlook remain (Section 1).

Market expectations suggest policy rates have peaked and will come down more quickly than anticipated in November.

Over the past two years, central banks in the UK, US and euro area have tightened policy (Chart 2.6). Since November, the FOMC and the ECB Governing Council have kept their main policy rates unchanged, at 5.25%–5.5% and 4% respectively.

Recent developments in inflation and labour market data across advanced economies, alongside perceptions of more dovish central bank communications, have brought forward the expected timing, and raised the anticipated degree, of future reductions in policy rates. Since the November Report, the market-implied paths for policy rates in both the US and the euro area have shifted down by about 70 basis points on average over the next three years, with policy rates now expected to stand at around 3¼% and 2% respectively at the end of 2026 (Chart 2.6).

Since the November Report, market expectations of UK policy rates have fallen by about 90 basis points over the next three years, on average (Chart 2.6), following a decline of around 60 basis points across the curve between the August and November Reports. Expectations of UK policy rates are broadly in line with expectations for the federal funds rate in three years’ time and higher than for the ECB’s policy rate.

Global financial conditions have loosened materially in recent months.

Lower market expectations of future policy rates appear to have been driven mainly by perceptions of a quicker fading of global inflationary pressures rather than concerns around future activity, and hence have coincided with a broad-based loosening of global financial conditions.

Government bond yields have fallen across major advanced economies since the November Report. Yields on 10-year government bonds are 70 basis points lower in the US, 60 basis points lower in Germany and 70 basis points lower in the UK. The recent declines in long-term rates reflect to some extent lower expected rates, but also appear to have been driven by lower term premia – the compensation that investors require for the risks associated with holding government bonds of longer duration.

Corporate credit spreads have also declined by over 20 basis points across advanced economies, and equity prices have picked up by around 11% in the US and 8% in the euro area. UK equity prices have increased by around 2%, partly reflecting the FTSE’s relatively higher weight of energy and commodity firms, which have performed less well since November.

The sterling effective exchange rate has appreciated by about 2% since the November Report. Sterling has appreciated by 4% against the dollar and by 1% against the euro.

UK mortgage rates have continued to decline.

Credit availability has been broadly unchanged since November.

UK GDP weakened in 2023 H2…

GDP fell by 0.1% in 2023 Q3, with broad-based falls across household consumption, business investment and housing investment (Chart 2.10). That was offset in part by higher government expenditure and net trade, although the latter was driven by weak imports associated with the weakness in domestic demand.

Monthly GDP declined further in October but rebounded in November, such that GDP is expected to have been broadly flat across 2023 Q4 as a whole. Market sector output is expected to have declined by around ¼% in both Q3 and Q4.

Together with revisions earlier in the year, cumulative growth over 2023 now appears to have been around ½ percentage point weaker than expected at the time of the November Report. In particular, the path for household consumption has been notably below the MPC’s expectations. Recent weakness in demand reflects a combination of factors, including the past squeeze on real incomes from higher global prices, restrictive monetary policy (Box C), the unwinding of previous fiscal support and weak supply growth.

…but is expected to pick up a little in 2024 Q1.

GDP is projected to pick up a little in 2024 Q1. Set against the weakness in the latest official data, timelier indicators suggest that activity has stabilised and may be edging up again. The S&P Global/CIPS UK composite output PMI bounced back above the 50 ‘no change’ mark in November and rose further in December and in the flash estimate for January, albeit remaining below its historical average (Chart 2.11). Business survey indicators of future growth have remained more positive. Notably, the output expectations PMI for the year ahead is above its historical average, and the 12-month ahead measure in the Lloyds Business Barometer has risen to its highest level since 2017. Contacts of the Bank’s Agents report that activity has remained weak in Q1, although they expect that activity may begin to pick up in coming quarters (Box D).

Consumption has been weak, but timelier indicators point to some improvement.

The latest official estimates of household consumption have been weaker than expected, including a 0.5% fall in 2023 Q3. Retail sales volumes fell by around 1% in both 2023 Q3 and Q4, with volumes in December at their lowest level since May 2020. These falls were widespread across most store types. Output for consumer-facing services companies also fell over the course of Q3. The recent broad-based weakness, coupled with downward revisions to consumption for the first half of 2023, seems consistent with a higher cost of living and the restrictive stance of monetary policy alongside less fiscal support.

Most of the impact of tighter monetary policy on housing investment seems to have come through, while there are now clearer signs of higher interest rates affecting business investment.

Housing investment fell by 1.4% in 2023 Q3, continuing the trend of consecutive falls since mid-2022, and broadly in line with the November Report forecast. The ONS splits housing investment into three main categories: investment in new dwellings; improvements, repair and maintenance of existing dwellings; and transfer costs, which captures spending on activities associated with property transactions. The fall in housing investment in Q3 was mainly driven by a fall in new dwellings, whereas transfer costs were little changed. Spending on home improvements has tended to be resilient in recent quarters.

Alongside labour market tightness and services CPI inflation, the MPC is monitoring closely various measures of wage growth, which can provide evidence of more persistent domestic inflationary pressures. Annual private sector regular AWE growth has declined from just above 8% over the summer to 6.5% in the three months to November, 1 percentage point below the November Report projection. The recent slowing has brought the official measure closer to the steer from other indicators of annual pay growth, which has been in the range of 6%–7%.

The pickup in AWE growth over the summer of 2023, and much of the subsequent unwind, may have been driven by transitory factors. Bank staff have estimated a statistical model to decompose whole-economy total AWE growth, which increased at the same time as private sector regular pay growth, into a trend and more volatile transitory elements. The trend component has been relatively stable over the past year (Chart 2.15).

In the MPC’s latest projection, private sector regular pay growth is expected to slow further in 2024, informed by the latest steer from surveys of pay. Pay growth is projected to decline to around 5¾% in 2024 Q1 and 4¾% in Q2, ending this year at a similar rate (Chart 2.16). This profile reflects a judgement to push up slightly on pay growth in the near term, in light of the stronger forward-looking indications from the Agents pay survey and from the DMP. Contacts of the Bank’s Agents expect annual pay settlements to average 5.4% in 2024 (Box D), and for there to be fewer additional payments provided to compensate for a higher cost of living. Respondents to the DMP Survey expect wage growth to slow to around 5% over the next 12 months.

Lower inflation expectations and a looser labour market are expected to lead to a decline in pay growth. The pickup in wage growth since 2021 has been driven in large part by rising headline inflation and the associated increase in near-term inflation expectations. As headline inflation and near-term inflation expectations have started to fall, they are likely to exert less upward pressure on pay growth (Chart 2.17). Labour market tightness has also played a role in elevated nominal wage growth to date. With the labour market now loosening (Section 2.2), some of the upward pressure on wage growth should continue to ease. Pay growth appears to be somewhat firmer than developments in inflation and labour market slack would suggest, however, and there is also significant uncertainty around how both of these factors will develop.

Twelve-month consumer price inflation fell to 4.2% in 2023 Q4 and 4.0% in December, compared with the 6.7% figure for Q3 (Chart 2.18). Around 2 percentage points of the drop in 12-month inflation occurred in October, with three quarters of the fall that month related to energy prices. The Ofgem energy price cap was reduced to £1,834 annually for 2023 Q4, reflecting the decline in wholesale gas prices over the course of the year. Because the cap rose significantly in October 2022, the lower level of the cap in October 2023 had a material impact on annual inflation rates. Food price inflation has also slowed, in part owing to developments in commodities prices.

Core CPI inflation, which excludes energy, food, beverages and tobacco, has fallen since the summer of 2023, but at a slower pace than the headline rate. Core inflation stood at 5.1% in December, down from 6.1% in September. The decline in core inflation was skewed towards core goods inflation, which dropped by more than 1 percentage point to 3.1% in December. Services inflation fell less sharply, by 0.5 percentage points to 6.4%.

Headline CPI inflation in December was 0.6 percentage points lower than the November Report forecast, with the downside news spread across fuel prices and a wide range of core goods and services components.

Following a small expected increase in January, CPI inflation is projected to fall by around another 2 percentage points in 2024 Q2, dropping to around the 2% target (Chart 2.18). Inflation in a range of goods and services has declined by more than expected in November, and energy prices have fallen significantly, driving reductions in the MPC’s near-term forecast for CPI inflation. Beyond Q2, CPI inflation is projected to increase to 2¼% in Q3 and to 2¾% in Q4, as the direct energy price contribution becomes less negative.

Core CPI inflation is also projected to fall in the near term, but to a higher rate than headline inflation of close to 3½% in 2024 Q2. That reflects core inflation being more closely tied to domestic inflationary pressures than global factors. Between Q2 and Q4, CPI inflation excluding energy is expected to be relatively stable at or above 3% (Chart 1.1).

Falling energy prices are projected to reduce consumer price inflation…

Gas futures prices for 2024 have fallen by about 40% compared with the November Report, contributing to a more benign outlook for household energy costs. Falling utilities prices are expected to continue to drag on CPI inflation significantly over the course of 2024, with a peak drag of 1.3 percentage points in 2024 Q2 (Chart 2.18). Conditioned on the most recent set of wholesale prices, the drag from utilities price inflation is then expected to fade from the second half of this year. Retail fuel prices fell earlier than utilities prices, and therefore the related drag has largely come through in the latest CPI data. The contribution of retail fuel prices to inflation is projected to be closer to zero in 2024 Q1 and positive in Q2, although that relies on the Government choosing to go ahead with the planned increase in fuel duty in March and April, which would push up on CPI inflation by 0.2 percentage points. However, the outlook for consumer energy prices is uncertain given events in the Middle East (Section 1).

More stable food prices are also expected to contribute to lower CPI inflation (Chart 2.18). Having risen by around 30% between September 2021 and May 2023, prices of food and non-alcoholic beverages have plateaued. Food prices are projected to be broadly flat over the forecast period, in line with producer input costs. This is expected to lead to a sizable fall in the contribution of food prices to CPI inflation, from 0.9 percentage points in December 2023 to around 0.1 percentage points by 2024 Q2. Additional border checks being introduced this year on food, animal and plant products imported from the EU are expected to have only a small impact on food price inflation.

Easing input cost pressures should also continue to reduce consumer goods price inflation in the near term. Producer output price inflation, which measures the change in the price of goods sold by UK manufacturers, has fallen significantly since mid-2022, and was close to zero in 2023 Q3 and Q4. The drivers of these movements have been predominantly global (Section 2.1). Changes in the prices of consumer goods tend to roughly follow changes in producer prices with a lag. The moderation in producer price inflation therefore suggests goods price inflation will continue to fall in the near term.

Alongside labour market tightness and wage growth, services CPI inflation is one of the MPC’s key indicators of domestic inflationary pressure. While energy, food and core goods price inflation all fell rapidly over 2023, services price inflation remained significantly elevated (Chart 2.19).

As well as being higher on average, the distribution of services price inflation has also been wider than before the pandemic. Much of the pickup in services inflation in the middle of 2023, and the subsequent drop-off, reflected components that are not typically reliable indicators of trends in inflation persistence, such as non-private rents, accommodation and airfares. Excluding these components, services inflation was more stable over 2023, and has declined in recent months (Chart 2.20). An underlying measure of services inflation produced by Bank staff, intended to strip out idiosyncratic fluctuations, has also been falling gradually but over a slightly longer period. However, all these measures indicate that services inflation remains elevated.

Household and business inflation expectations are an important indicator of inflationary pressure, as together they can affect wage and price-setting behaviour. Short term, one year ahead household inflation expectations were around 4% in the latest YouGov/Citigroup survey, a fall of a little over 1½ percentage points during the course of 2023 (Chart 2.21). Short-term household inflation expectation measures tend to be strongly related to current inflation rates, which suggests that these measures are likely to fall as headline inflation declines in coming months. Measures of medium-term household inflation expectations, such as the five to 10 year ahead measure in the YouGov/Citigroup survey, have been broadly flat, at close to their 2010–19 averages. Close to a fifth of respondents to this survey expected inflation to be as high as 6% or more on average over the medium term, above the pre-pandemic proportion but well below the peak of 31% of respondents recorded in August 2022.

In the DMP Survey, firms’ short-term expectations for CPI inflation in the year ahead declined to around 4% on average in the three months to January, a little below expectations of their own price inflation of around 4.3%. Medium term, three year ahead CPI expectations in the same period ticked down a little to just under 3%, compared to a peak of around 4.5% in September 2022.

Indicators of inflation expectations in financial markets have fallen since the November Report. The median respondent in the February Market Participants Survey expected CPI inflation of just under 2.5% one year ahead, down from 3% in November (Chart 2.21). Median five year ahead expectations were stable at 2%, with the distribution skewed to the upside.

3: In focus – The supply side of the economy

3.1: What is potential supply?

An economy’s supply capacity, or potential supply, is determined by both the amount of labour and capital available, as well as the efficiency with which these factors can be combined.

Growth in potential supply can be thought of as the underlying trend growth rate of GDP. It can be decomposed into contributions from underlying growth in labour supply and productivity. Those variables are referred to here as ‘potential labour supply’ – capturing the amount of labour available to work in the economy – and ‘potential productivity’ – the efficient productivity of that labour.

These variables can be further broken down into their constituent drivers. For example, aggregate potential labour supply is determined by the size of the population, how many of those people are likely to participate in the labour force and to be employed in equilibrium, and their desired hours worked. Potential productivity can be decomposed into contributions from capital deepening – the amount of capital available per worker – and ‘total factor productivity’ – the efficiency with which capital and labour are combined to produce output.

In the long term, growth in the economy’s potential supply capacity is largely determined by structural factors…

In the long term, the rate of potential supply growth represents where the growth rate of GDP is expected to settle after the economy has fully adjusted to business cycle shocks. These long-run trends are determined by slow-moving structural factors such as technological progress, capital accumulation and determinants of the size and skills of the labour force, such as demographic trends.

…but, over the shorter term, potential supply growth can also be impacted by temporary factors.

In the shorter term, potential supply can be affected by temporary factors, as well as those slow‑moving structural trends. The public health measures introduced during the Covid pandemic are one example of this, with nationwide lockdowns resulting in many businesses being forced to close and a large proportion of the workforce placed onto furlough. As closures were only enforced temporarily, they had no effect on supply in the long run.

Periods where there are few job opportunities in the labour market offer another example. Some people may search for work less intensively during these periods or even leave the labour force entirely. If they then take up another opportunity, such as full-time study, they may be unlikely to re-enter the labour market for a period of time. This would temporarily weigh on potential labour supply but would not affect long-running trends if these people eventually returned.

While shorter-term factors may provide a temporary drag or boost, potential supply growth should return towards its estimated long-term rate as their effects fade.

Potential supply determines how much output can rise before it generates inflationary pressure.

The extent to which the prevailing level of GDP falls short of the level of potential supply represents the degree of spare capacity in the economy. Spare capacity can be within the labour market, for example if people are out of work or working fewer hours than they desire, or within companies, if capital is underutilised. This matters for monetary policy because it affects inflationary pressures. For example, if measured GDP is below potential supply, there is excess supply and firms may want to boost demand for their goods and services by slowing the pace of price rises. If measured GDP exceeds potential supply, there is excess demand in the economy and that puts upward pressure on inflation.

Potential supply cannot be observed directly, however, and therefore must be estimated. Estimates are inherently uncertain as it is difficult in practice to identify precisely how factors affecting measured GDP are also affecting its potential level.

3.2: How has potential supply responded to past shocks?

Potential supply growth slowed materially after the global financial crisis (GFC).

Estimates suggest that potential supply growth slowed markedly after the GFC (Chart 3.1 and Table 3.A). Potential supply growth is estimated to have fallen from its average of 2.9% in the decade leading up to the GFC to around 1.4% over 2010–14 and 1.8% over 2015–19.

Similarly, analysis of energy-intensive industries suggests that risks of a persistent hit to supply from the global energy price shock may have reduced.

The MPC has been increasing its assessment of the degree of excess demand in the economy over the recent past, implying weaker supply.

As well as assessing the impact of particular shocks on components of potential supply, the MPC also forms a top-down view of spare capacity and uses this view to pin down its assessment of the current and past level of potential supply in aggregate.

The Committee has judged in recent rounds that there has been a significant margin of excess demand in the economy over the past two years, in part reflecting the weakness of potential supply. That excess demand has been accounted for by the tightness of the labour market and, prior to 2023, a higher than normal degree of capacity utilisation within companies. Throughout the past year, the Committee has made successive upward revisions to its view on the degree of excess demand.

Capital deepening is expected to play somewhat less of a role in driving potential productivity growth over the forecast horizon.

Innovations in AI technologies are likely to bring about changes in the way some sectors operate, but the speed of take-up and implications for productivity are uncertain.

AI refers to a branch of computer science which focuses on programming computers or machines to perform tasks normally requiring human intelligence. According to a recent survey by the Bank’s Agents, almost 30% of companies in the UK reported making new significant or transformative AI investments in the past year. These technologies are likely to impact productivity because they have the potential to bring large changes in the way some sectors work. This is especially the case for generative AI – a form of AI that is trained using large data sets and is capable of generating new content.

Increases in investment in order to try and achieve net-zero emissions by 2050 may spur an increase in long-run trend productivity growth.

Potential labour supply

Population growth is expected to support potential labour supply growth, although long-term demographic trends provide a slight drag.

Potential labour supply growth has been notably weak over 2020–23 (Chart 3.8). It is expected to rise to around ½% in 2024, however, a rate at which it is broadly expected to remain for the rest of the forecast period.

Long-term slow-moving demographic factors have been, and are expected to continue to be, playing a large role in the evolution of potential labour supply growth. In particular, an ageing population is expected to continue to weigh on trend labour force participation and average hours worked. Potential labour supply growth over the forecast horizon is instead supported by population growth (Chart 3.8).

The MPC has revised up its view of potential participation since the previous supply assessment…

The potential participation rate is now expected to be broadly flat over the forecast as an unwinding of the Covid-related drag (Section 3.2) offsets the effects of an ageing workforce (Chart 3.2). This assessment will be reviewed by the Committee following the publication of reweighted LFS statistics. Potential participation is also expected to be supported by a number of recent government policy announcements (Box A).

…but has also revised up its view of the medium-term equilibrium unemployment rate over the past year…

In recent forecasts, the MPC has made a judgement to increase its estimate of the medium-term equilibrium unemployment rate, which is judged to be around 4½% at present. An increase in the medium-term equilibrium rate of unemployment reduces the amount of people who can be in employment in the labour market without generating excess inflationary pressures and thus pushes down on aggregate supply.

The equilibrium unemployment rate may have increased if employees and domestic firms have sought compensation in the form of higher nominal pay and domestic selling prices for the reductions in real incomes that they have experienced after the terms of trade shock. Over the forecast, the medium-term equilibrium unemployment rate is projected to rise gradually, in part reflecting the projected rise in the actual unemployment rate over this period.

…though the long-term equilibrium rate of unemployment is still judged to be just above 4%.

The MPC judges that demand and supply were broadly balanced in 2023 Q4, but that a margin of excess supply is expected to emerge during the first half of the forecast period.

As outlined in Section 1, measured GDP growth is expected to increase only gradually over the forecast period. That reflects subdued potential supply growth but also the significant increase in Bank Rate since the start of this tightening cycle and a waning boost from fiscal policy. As such, a margin of excess supply is judged to emerge during the first half of the forecast period, and to remain around 1% of potential GDP towards the end of the forecast period (Chart 3.9), putting downward pressure on inflation. That is somewhat shallower than its path in the November Report, reflecting the boost to demand from the lower market path of interest rates, which more than offsets somewhat stronger potential supply growth.

This annex reports the results of the Bank’s most recent survey of external forecasters. Responses were submitted in the two weeks to 19 January and are summarised in Chart A. These are compared with the MPC’s modal projections, which are conditioned on a range of assumptions (Section 1.1) that may differ from those made by external forecasters.

On average, forecasters expected a 0.9% rise in GDP over the four quarters to 2025 Q1 (left panel, Chart A). Four-quarter GDP growth was then expected to rise, on average, to 1.5% in 2026 Q1 and to remain relatively stable at 1.6% in 2027 Q1. These forecasts are higher than the MPC’s modal projections for 2025 Q1 and 2026 Q1, of 0.5% and 0.8% respectively and broadly in line for 2027 Q1.

External forecasters expected an unemployment rate of 4.7% in 2025 Q1, in line with the MPC’s projection (middle panel, Chart A). The average external forecast then falls to 4.5% for 2026 Q1 and 2027 Q1. By comparison, in the MPC’s projection, the unemployment rate increases to 4.9% in 2026 Q1 and remains at that level in 2027 Q1.

CPI inflation was expected to fall on average, to 2.0% in 2025 Q1, below the MPC’s projection of 2.8% (right panel, Chart A). The average forecasts for 2026 Q1 and 2027 Q1 were broadly in line with the 2% target at 2.1% for both periods, contrasting with the MPC’s modal projections of 2.3% and 1.9% respectively.

Chart A: At the three-year horizon, external forecasters expected four-quarter GDP growth to be 1.6%, the unemployment rate to be 4.5%, and CPI inflation to be 2.1%

Projections for GDP, the unemployment rate and CPI inflation