Monetary Policy Report – May 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 8 May 2024, the MPC voted by a majority of 7–2 to maintain Bank Rate at 5.25%. Two members 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 May Monetary Policy Report and are conditioned on a market-implied path for Bank Rate that declines from 5¼% to 3¾% by the end of the forecast period, compared with an endpoint of 3¼% in February.

Internationally, recent growth outturns have tended to be stronger in the United States than in the euro area. Underlying inflationary pressures in both regions have continued to moderate somewhat since the start of the year, though by less than expected in the United States. Forward interest rates have risen in the United States and, as a result, elsewhere.

Following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2. Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period. A margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter, in part reflecting the continued restrictive stance of monetary policy.

With respect to indicators of inflation persistence, services consumer price inflation has declined but remains elevated, at 6.0% in March. There remains considerable uncertainty around statistics derived from the ONS Labour Force Survey. It is therefore more difficult to gauge the evolution of the labour market. Based on a broad set of indicators, the MPC judges that the labour market continues to loosen but that it remains relatively tight by historical standards. Annual private sector regular average weekly earnings growth declined to 6.0% in the three months to February, although that series tends to be volatile. Alternative indicators also suggest easing pay growth.

Twelve-month CPI inflation fell to 3.2% in March from 3.4% in February. CPI inflation is expected to return to close to the 2% target in the near term, but to increase slightly in the second half of this year, to around 2½%, owing to the unwinding of energy-related base effects. There continue to be upside risks to the near-term inflation outlook from geopolitical factors, although developments in the Middle East have had a limited impact on oil prices so far.

Conditioned on market interest rates and reflecting a margin of slack in the economy, CPI inflation is projected to be 1.9% in two years’ time and 1.6% in three years in the May Report.

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 continued to fall back, in part owing to base effects and external effects from goods prices. The restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labour market and is bearing down on inflationary pressures. Key indicators of inflation persistence are moderating broadly as expected, although they remain elevated.

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. The Committee will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding. On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level.

1: The economic outlook

1.1: The conditioning assumptions underlying the MPC’s projections

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

1.2: Key judgements and risks

1.2: Key judgement 1

Following modest weakness last year, four-quarter GDP growth is expected to pick up during the forecast period.

UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2, stronger than expected in the February Report (Section 2.3). That follows weaker than expected GDP in the second half of last year, however, leaving activity at a similar level by the middle of this year as in the February projection. Household consumption was also weak during the second half of last year, but is expected to pick up throughout 2024, supported by a continued recovery in real incomes. That in turn partly reflects the continued unwinding of the shocks to energy and other imported goods prices experienced over recent years, and the effect of lower national insurance contributions. Real post-tax labour income is now expected to grow by over 3% in 2024 as a whole (Table 1.D).

The policies announced in the Spring Budget, including the further reduction in national insurance contributions, are expected to boost the level of GDP by over ¼% relative to the February Report projections. As these measures are also likely to boost potential supply, 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, and given that the impact of past fiscal loosening measures, including those related to the pandemic and the energy price shock, continues to fade, the stance of fiscal policy tightens over the projection. This pulls down on the Committee’s GDP growth projection beyond the near term.

Based on the average relationships over the past between Bank Rate and economic activity, Bank staff estimate that under current and expected financial conditions around two thirds of the peak domestic impact of higher interest rates on the level of GDP has come through. The negative impact on the level of GDP from the remaining pass-through continues to build over the first half of the forecast period. There is nevertheless a fading negative impact on the rate of GDP growth from past increases in Bank Rate and the downward-sloping market-implied path of forward interest rates, which begin to boost growth at the end of the period.

As discussed in the previous Report, the ONS’s updated population projections were not available in time to be reflected in the Committee’s February supply-side stocktake. The May projections are now conditioned on the most recent ONS population projections (Section 1.1), run forward after taking account of the starting point implied by the latest LFS population data (Box D). For example, the 16+ population is now assumed to rise by around 1% per year in the medium term, compared with around ¾% previously. All else equal, this raises significantly the paths of labour supply and potential output over the forecast period, relative to the February Report. In the May projection, aggregate supply growth is projected to rise to around 1¾% in the middle of the forecast period and to average 1½% over the next three years. A higher path for the population is assumed to have similar impacts on both supply and demand, and thus only a limited impact on spare capacity in the economy (Key judgement 2). Further upward revisions to the LFS population data are to be expected in the future.

There remain notable differences in patterns of international economic activity, with recent growth outturns tending to be stronger in the US and weaker in the euro area (Section 2.1). Activity in the euro area is projected to pick up in the near term, accounted for by the fading impact of tighter monetary policy and by stronger real incomes. US GDP growth is expected to slow somewhat over the forecast period, as the boost from consumer dis-saving fades and as potential supply growth, which has been strong, falls back to more normal rates. In the May Report, the path of global growth is broadly similar to February. 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).

Overall, in the Committee’s May projection, UK four-quarter GDP growth is projected to pick up during the forecast period, to just over 1½% by the end of the forecast period (Chart 1.2). That reflects the fading negative impact on growth from past increases in Bank Rate and the downward-sloping market-implied path of forward interest rates, which begin to boost growth at the end of the period. Population growth is assumed to be higher throughout the forecast period. During the first half of the period, the pickup in GDP growth also reflects fiscal policy and the boost to real incomes from the continued unwinding of the previous shocks to energy and other imported goods prices.

Relative to the February Report projection, the level of GDP has been revised up by around ½% by the end of the forecast period, accounted for by stronger assumed population growth and the fiscal loosening measures in the Spring Budget. Compared with February, the rise in the market path of interest rates over recent months pushes down on GDP, all else equal, although this is partly offset by developments in other financial conditions.

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 weaker 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. The Committee will continue to monitor closely the impact of past increases in Bank Rate, including the channels through which house prices affect consumer spending. In the near term, there may be upside risks to GDP growth from stronger demand if some households choose to save less or run down existing stocks of savings to a greater extent. Respondents to the latest Bank/NMG survey have become more optimistic about their job security, financial prospects and expected real income growth. Set against that, the Bank’s Agents have reported subdued consumer demand at the start of this year (Box E). And the household saving ratio is expected to be downward sloping in the medium term, which may not arise given the projected rising path of unemployment (Key judgement 2).

Internationally, the risk of higher commodity prices and disruption to trade flows associated with developments in the Middle East could lead to weaker economic activity as well as greater external inflationary pressures (Key judgement 3). There is also a downside risk to global growth if domestic demand in China proves to be softer than expected, for example due to weakness in the property sector.

1.2: Key judgement 2

Aggregate demand and supply are judged to be broadly in balance currently, but a margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter, in part reflecting the continued restrictive stance of monetary policy. Unemployment is expected to rise somewhat.

Following a period over the past couple of years in which the economy was operating with excess demand, aggregate demand and supply are judged to be broadly in balance currently. Over the past year, businesses appear to have responded to short-term weakness in demand by retaining their existing employees, while using them somewhat 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 D, there remains considerable uncertainty around statistics derived from the ONS Labour Force Survey, making it more difficult to gauge the evolution of the labour market. Although work is underway to replace it, the LFS will remain a key source of labour market data for some time to come. The latest LFS data appear to suggest that the unemployment rate has increased slightly over the past year, but that there is no longer any sign that the inactivity rate has fallen over the same period (Chart 2.14). Underlying employment growth has slowed but remained positive in recent quarters. Overall, based on a broad set of indicators, the MPC judges that the labour market continues to loosen but that it remains relatively tight by historical standards.

Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period, such that a margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter. That in part reflects the continued restrictive stance of monetary policy. Aggregate excess supply is expected to reach around 1¼% of potential GDP by the start of 2026, compared with around 1% of GDP in the February Report. This slightly greater margin of excess supply relative to February reflects the impact on demand from the recent rise in the market path of interest rates.

Uncertainty around LFS data notwithstanding, the unemployment rate is projected to rise somewhat over the first half of the forecast period, such that it exceeds the assumed medium-term equilibrium rate of just over 4½% by the middle of next year. The unemployment rate reaches around 4¾% by the end of 2025 (Chart 1.3), a slightly lower path for unemployment than in the February Report. Some of the slack in the labour market that is expected to emerge over the forecast period also reflects weakness in the participation rate. Employment growth is stronger than in the February Report throughout the forecast period, reflecting the updated population growth assumption.

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 2024 Q1. Although LFS unemployment data have recently been re-instated by the ONS, they are badged as official statistics in development and the LFS continues to suffer from very low response rates, which can introduce volatility and potentially non-response bias (Box D). The fan chart 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. 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 greater extent compared with the MPC’s projection conditioned on market rates.

The risks around the unemployment rate projection are judged to be broadly balanced.

Reflecting the continuing uncertainties around interpreting estimates from the LFS, there are risks in both directions around the recent path of the unemployment rate, and hence the outlook for unemployment and labour market tightness. The labour market could remain tighter or looser than assumed for a number of economic reasons, including the risks around the outlook for demand (Key judgement 1). There is also continuing significant uncertainty around the Committee’s assumptions for the path of the equilibrium rate of unemployment, news in which would, holding demand fixed, have implications for labour market tightness and inflationary pressures.

Based on the data available at the time of its supply stocktake published in the February Report, the MPC judged that the Covid-related drag on potential participation might be unwinding faster than anticipated. This now stands in contrast to the latest indications from the aggregate LFS participation series. There are considerable uncertainties around these data, however, and an alternative approach suggests that the participation rate could be significantly higher than currently estimated (Section 2.3).

1.2: Key judgement 3

CPI inflation is expected to return to close to the 2% target in the near term, but to increase slightly in the second half of this year owing to the unwinding of energy-related base effects, which reveals the persistence of domestic inflationary pressures. The Committee expects second-round effects in domestic prices and wages to take longer to unwind than they did to emerge. The best collective judgement of the Committee is that these second-round effects are likely to fade slightly faster than assumed previously, pushing down on the latest CPI inflation projection during the third year of the forecast period.

Twelve-month CPI inflation remains above the MPC’s 2% target, but it declined to 3½% in 2024 Q1 and to 3.2% in March, broadly in line with expectations in the February Report. Inflation is projected to return to close to the 2% target throughout the second quarter of this year, before increasing slightly in Q3 and in Q4, to around 2½%. This profile of CPI inflation over the second half of the year is more than accounted for by developments in the direct energy price contribution to 12-month inflation, which is projected to become less negative during Q3 and Q4 compared with Q2 (Chart 1.1). CPI inflation excluding energy is projected to be around 3% during the second half of the year, owing to the persistence of domestic inflationary pressures.

As part of the May forecast round, Bank staff have reviewed the degree to which past increases in import prices are yet to pass through to consumer prices. Based on recent developments in producer and consumer goods prices, the MPC now judges that a greater proportion of that pass-through has occurred already, relative to the assumptions incorporated into previous inflation projections. A shorter than usual lag between changes in import and consumer prices may have reflected the nature of the external shock, including that it was associated with acute shortages of products. This was a large external cost shock facing almost all companies in some form. This behaviour may have reflected domestic economic conditions to some extent as well, as companies were likely to have had greater than usual pricing power to pass on cost increases. As a result of this change in judgement, external inflationary pressures on the CPI are likely to be somewhat weaker than previously assumed, particularly during the first half of the forecast period.

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 fell to 6.0% in March, slightly higher than expected in the February Report. Higher-frequency measures of services price inflation show a somewhat greater slowdown than annual rates but still indicate elevated domestic inflationary pressures (Section 3.3). Services inflation is expected to continue to ease gradually over the course of this year, as wage growth and indirect effects from energy and other goods prices weaken further.

Annual private sector regular AWE growth declined to 6.0% in the three months to February, slightly higher than expected in the February Report, and broadly in line with alternative indicators of wage growth. Recent outturns in wage growth have continued to be stronger than standard models would have predicted (Chart 3.10). Private sector regular AWE growth is nevertheless expected to slow further in the near term, to around 5% during the rest of this year, compared with 4¾% in the February Report.

As part of this forecast round, the Committee has reviewed its judgement that second-round effects in wages and domestic prices will take longer to unwind than they did to emerge. Specifically, the February CPI inflation projection assumed that this metric of the degree of excess persistence would build marginally further in the near term before tapering off over coming years but remaining present at the end of the forecast period. Based on the latest evidence and modelling presented by Bank staff (Section 3), the best collective judgement of the Committee is that these second-round effects on domestic prices and wages are likely to fade slightly faster than assumed previously, pushing down on the latest CPI inflation projection during the third year of the forecast period. There remains considerable uncertainty around the calibration of this judgement and a range of views among MPC members (as set out in the subsequent risks sub-section).

In the MPC’s modal, or most likely, projection conditioned on the higher market-implied path of interest rates as captured in the 15-working day average to 29 April, CPI inflation increases from close to the 2% target in 2024 Q2 to around 2½% at the turn of the year. Reflecting the continued restrictive stance of monetary policy and a margin of slack in the economy (Key judgement 2), CPI inflation then falls back again, to 1.9% in two years’ time and to 1.6% in three years (Table 1.C and Chart 1.4).

The May CPI inflation projection has a broadly similar trajectory to the February projection, but it is slightly lower next year and, to a somewhat greater extent, in the medium term, reaching the 2% target two quarters earlier than in February. This lower profile in part reflects weaker external inflationary pressures following the Committee’s revised judgement on the pace of previous import price pass-through. In the medium term, it also reflects the building impact on inflation of a slightly greater margin of excess supply in this forecast conditioned on the latest market interest rate path, and the Committee’s judgement to unwind slightly earlier in this forecast its judgement on the degree of medium-term persistence in domestic prices.

In the MPC’s May projection, private sector regular AWE growth falls further during 2025 and reaches just under 3% by the end of the forecast period, as short-term inflation expectations are assumed to fall back further 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 as in the February Report.

Chart 1.4: CPI inflation projection based on market interest rate expectations, other policy measures as announced

Footnotes

• The fan chart depicts the probability of various future outcomes for CPI inflation and begins in 2024 Q2. 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. If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective judgement is that inflation in any particular quarter would lie within the darkest central band on only 30 of those occasions. The fan chart is constructed so that outturns of inflation are also expected to lie within each pair of the lighter orange areas on 30 occasions. In any particular quarter of the forecast period, inflation is therefore expected to lie somewhere within the fans on 90 out of 100 occasions. And on the remaining 10 out of 100 occasions inflation can fall anywhere outside the orange area of the fan chart. Over the forecast period, this has been depicted by the grey background. See the Box on pages 48–49 of the May 2002 Inflation Report for a fuller description of the fan chart and what it represents.

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 fall below 2% from 2025 Q4 onwards. This path is lower than the Committee’s modal projection conditioned on market rates.

There continue to be upside risks to the modal CPI inflation projection from geopolitical factors during the first half of the forecast period, but the risks overall are more evenly balanced over the second half.

There are near-term risks in both directions around the path of CPI inflation from domestic factors, including related to developments later this year in pay settlements and in companies’ price-setting behaviour. The Bank’s Agents continue to report that settlements will average around 5½% this year, with higher outturns expected in consumer-facing sectors owing to the impact of the increase in the National Living Wage. The latest Agency intelligence also suggests, however, that companies’ relatively downbeat view of recent consumer demand could limit the extent to which they are able to pass on increases in costs to their prices.

In the medium term, there are also risks around the judgement that second-round effects in domestic prices and wages take longer to unwind than they did to emerge.

To the downside, the recent accumulation of evidence could support an earlier tapering of the Committee’s persistence judgement than has been incorporated into the May projection during the third year of the forecast period. As headline inflation and short-term inflation expectations fall further (Section 2.5), inflationary dynamics could adjust as rapidly on the downside as they did on the upside. Less persistence could also reflect the continued unwind of the previous shocks to energy and other imported goods prices, which may be limiting the extent to which employees and domestic firms are seeking higher nominal pay and domestic selling prices to recover the reductions in real incomes that they experienced in the past.

To the upside, in the absence of clear evidence from recent developments that domestic inflationary pressures have moderated significantly, there could be a case for maintaining the previous persistence judgement from the February Report across the full forecast period. The possibility of some upside risks to demand or downside risks to supply could, via a smaller margin of spare capacity in the economy and given a relatively tight starting point for the labour market, also motivate a higher medium-term profile for domestically generated inflation.

Overall, the risks around the Committee’s latest best collective judgement on the persistence of domestic price pressures are evenly balanced, following an extended period in 2022–23 during which they were skewed to the upside.

Global activity is expected to grow modestly in the near term.

Demand conditions in other countries are an important determinant of UK trading prospects. UK-weighted world GDP, which weights countries according to their shares in UK exports, grew by 1.8% in the four quarters to 2023 Q4. There were notable differences in growth across regions during 2023, with growth stronger in the US and weaker in the euro area (Chart 2.2). World GDP is projected to have grown by 0.5% on the quarter in 2024 Q1, and is projected to grow at a similar rate over the remainder of this year.

US GDP grew by 0.8% in the final quarter of 2023, higher than anticipated in the February Report. Faster supply growth appears to have contributed to the recent strength in US GDP growth, with upside news in net migration, labour force participation and productivity over the past year. Advance estimates suggest US GDP growth moderated to 0.4% in 2024 Q1. Quarterly US GDP growth is projected to average a similar pace throughout the remainder of 2024.

According to the preliminary flash release, euro-area GDP grew by 0.3% in 2024 Q1 following a contraction of 0.1% in 2023 Q4. Euro-area growth over the course of this year is expected to be supported by a recovery in real incomes as the effects of the energy shock continue to fade and as the impact of tighter monetary policy wanes.

Although China accounts for only a small share of UK exports, its prominent role in the global manufacturing sector means that China has an important influence in commodities and globally traded goods markets. Chinese GDP is estimated to have grown by 1.6% in 2024 Q1, with quarterly growth expected to fall back to 1.1% in 2024 Q2. Growth over the rest of the year is expected to be supported by looser fiscal policy. Chinese export values fell in the year to March, but surveys of export orders have been recovering in recent months.

Global export price inflation is expected to remain weak in the near term…

Global supply and demand conditions determine the degree of inflationary pressures in globally traded goods and services markets. Global export price inflation has a direct effect on UK CPI inflation – through its impact on the prices of goods and services imported by consumers – and an indirect effect – through its implications for the price of imported inputs into domestically produced goods and services. Four-quarter UK-weighted world export price inflation, excluding the direct effect of oil prices, eased markedly over 2023, reflecting the indirect effects of lower energy prices, the continued clearing of supply chain bottlenecks and weak global producer price inflation. Global export price inflation is expected to remain weak in the near term but to a lesser extent as these factors move further into the past.

…though oil prices have risen in recent months…

The Brent spot oil price has increased by around 13% since the February Report, to $90 per barrel. The price remains much lower than its peak in mid-2022, however, and closer to its level around six months ago (Chart 2.3). Recent oil price rises have in part reflected geopolitical developments in the Middle East as well as the extension of production cuts by OPEC and other aligned oil producers, although increases in US crude oil production over the past decade have reduced slightly the exposure of global oil markets to these factors. In addition, prices are likely to have been boosted by indicators of strengthening global demand, in particular those from China.

European wholesale natural gas spot and near-term futures prices are little changed compared with the February Report. European gas storage is high for the time of year, and demand has remained subdued.

…and geopolitical developments still present a key source of uncertainty for both trade and energy prices.

A further escalation of recent geopolitical tensions, were it to arise, could lead to further disruption with larger and more prolonged effects, including on energy prices. The MPC will continue to monitor closely these developments, and their implications for the UK economy (Section 1.2).

Advanced economy labour markets continue to loosen but remain historically tight.

Inflation in advanced economies is being shaped by developments in domestic labour markets, alongside other input costs. Labour market tightness also plays a key role in determining the persistence of inflationary pressures.

One of the key metrics of labour market tightness, the vacancies to unemployment ratio, has been falling back across advanced economies. These declines can largely be attributed to fewer vacancies, though vacancy rates remain historically elevated (Chart 2.5).

Unemployment rates have remained relatively low across advanced economies, indicative of some tightness remaining in labour markets (Chart 2.5). In the latest data, the US unemployment rate rose a little to 3.9% in April, while non-farm payrolls grew by 175,000 in the same month. The unemployment rate in the euro area was unchanged at 6.5% in March.

Consumer price inflation has declined across many advanced economies over the past year or so, though services inflation is still particularly elevated.

Headline and core consumer price inflation have fallen back from their peaks in many advanced economies over the past year or so (Chart 2.6). Recent US inflation releases have, however, surprised to the upside. Headline PCE inflation ticked up to 2.7% and core PCE inflation was unchanged at 2.8% in March. In the euro area, headline HICP inflation was unchanged at 2.4% in April, and core inflation eased to 2.7%. Falls in core inflation over recent quarters have been accounted for by core goods prices, on account of easing global supply conditions and the indirect effects of lower energy prices.

Services price inflation has remained elevated in the US and the euro area, at 4.1% and 3.7% respectively in the latest available data – where the US measure excludes energy services to improve comparability. In part, this probably reflects developments in pay growth, with wage pressures elevated, albeit moderating, across economies. In the US, continued strength in housing services inflation is also playing a role.

Bank staff now expect US headline PCE inflation to level off around its current rate over 2024. That in part reflects the profile for services price inflation, which is expected to remain elevated at above pre-pandemic rates. Euro-area headline inflation is projected to moderate to around 2% by mid-2025. That is in large part driven by the continued fading of external cost shocks, with a further moderation in core inflation expected as the indirect effects from past rises in energy prices and pressures from supply bottlenecks continue to fade.

Market expectations of policy rates have risen since February…

Over recent years, central banks in the UK, US and euro area have increased their respective policy rates (Chart 2.7). Since 2023 Q3, the FOMC and the ECB Governing Council have kept their main policy rates unchanged, at 5.25%–5.5% and 4% respectively. The latest market-implied paths suggest that policy rates are likely to be reduced in coming quarters across advanced economies, though the expected timings of cuts differ.

Since the February Report, stronger than expected economic data, particularly inflation releases in the United States, and central bank communications have pushed out the expected timing of future reductions in policy rates across major advanced economies (Chart 2.7). Market contacts have begun to judge that the increasing divergence of the US economic outlook from that of other major advanced economies could be reflected in their monetary policies in the near term. But they also expect that, beyond 2024, the influence of global factors could result in greater macroeconomic and monetary policy convergence across advanced economies.

The market-implied paths for policy rates in both the US and the euro area have shifted up by about 90 and 50 basis points respectively, on average, over the next three years, with policy rates now expected to stand at around 4% and 2¼% respectively at the end of 2026.

Market expectations of UK policy rates have also risen since the previous Report, by about 70 basis points over the next three years, on average, following a decline of around 90 basis points across the curve between the November 2023 and February 2024 Reports.

…though corporate bond spreads have narrowed and equity prices have risen.

Although market-implied paths for policy rates across major advanced economies have risen since the February Report, corporate bond spreads have narrowed and equity prices have increased. Corporate credit spreads have declined by over 10 basis points across most advanced economies, and equity prices have picked up by 6% in the US and by 9% in the euro area. UK equity prices have increased by 5%.

Over the latter half of 2023, market contacts attributed the improvements in risky asset markets to expectations of lower policy rates. This mainly reflected perceptions of a more rapid fading of global inflationary pressures rather than concerns about future activity. Market intelligence suggests that the continued improvements in risky asset markets since the beginning of this year have reflected growing confidence that global growth and corporate earnings will improve going forward.

Elsewhere, the sterling effective exchange rate has been broadly stable since the February Report. Within that, sterling has depreciated by around 2% against the dollar.

Household deposit rates are little changed since February.

Instant-access savings accounts make up around two thirds of household deposits and tend to be priced relative to the current level of Bank Rate. Pass-through from previous increases in Bank Rate has been partial and slow overall but accelerated somewhat between June and October last year (right panel of Chart 2.8). Instant-access savings rates have since levelled off and remain around 2½ percentage points below Bank Rate in aggregate, with the gap close to its pre-financial crisis average. Interest rates on new fixed-rate savings bonds have been little changed since February (left panel of Chart 2.8).

UK mortgage rates have increased but remain well below their peaks last summer…

Since February, quoted mortgage rates have retraced some of their previous declines, largely reflecting pass-through of increases in risk-free reference rates (left panel of Chart 2.8). They remain substantially below the levels reached last summer, however. According to the latest Moneyfacts data, the number of advertised owner-occupied mortgage products is now back at the levels recorded before the start of the interest rate tightening cycle.

Economic growth was weak in 2023, with output contracting in the second half of the year…

GDP growth slowed in the first half of last year and then turned negative in the second half (Chart 2.9), leaving the level of output in 2023 Q4 around ¼% lower than a year earlier. Within that, GDP contracted by 0.3% in the final quarter, in contrast to an expected flattening in the February Report. The contraction reflected weakness in market sector output, although government sector activity also fell towards the end of the year (Box C).

Several factors, including the past squeeze on real incomes coming from higher energy, food and tradeable goods prices as well as past increases in Bank Rate, have been weighing on demand. Housing investment fell in each quarter of 2023 and household consumption also declined in the second half of the year, while business investment was volatile (Chart 2.9). Government spending continued to expand, offsetting some of this weakness in private demand.

…but GDP is likely to grow in the first half of 2024.

Economic activity appears to have begun to recover towards the end of last year moving into this one. Monthly GDP data rose by 0.2% in the three months to February, consistent with the improvement in business surveys. The S&P Global/CIPS UK composite output PMI, for example, has risen to around its historical average. GDP is now projected to increase by 0.4% in 2024 Q1 and by 0.2% in Q2, returning GDP to the level anticipated in the February Report from the middle of this year.

Survey indicators of future growth have remained more positive, although reports from the Bank’s Agents signal some ongoing near-term weakness. The output expectations PMI is currently above its long-term average, as is the one year ahead expectations measure from the Lloyds Business Barometer. Despite this positivity in business surveys, contacts of the Bank’s Agents reported weakness in consumer services and manufacturing in early 2024, while business services activity was more buoyant. Nonetheless, most contacts expect activity to strengthen as the year progresses (Box E).

Fiscal measures announced in the Spring Budget should increase the level of GDP over coming years.

The Government presented its Spring Budget 2024 in March, which included a number of measures expected to affect GDP over the forecast period. These included a further 2p reduction in the main rate of employee and self-employed National Insurance contributions and increases to the High Income Child Benefit Charge thresholds from April. Bank staff estimate that these measures will, relative to previous plans, increase the level of GDP by over ¼% over coming years. In addition to boosting demand, these measures are also expected to boost supply, including through higher labour market participation.

Following weakness at the end of last year, consumption growth is projected to pick up in coming quarters…

Household consumption growth weakened throughout 2023 and the latest data point to a more pronounced fall across the second half of the year. Although the decline in 2023 Q4 was broadly in line with expectations, downward revisions earlier in the year meant that the level of consumption in the final quarter was 0.3% below the February forecast.

This period of weak consumption has coincided with a recovery in households’ real incomes as the effects of past shocks to energy and other imported goods prices waned. Real post-tax household incomes rose by 1.6% in the four quarters to 2023 Q4, and within that, real post-tax labour incomes rose by closer to 3% (left panel of 2.10). Consistent with rising real incomes and lower consumption in aggregate, the household saving ratio increased over the course of the year to 10.5% in 2023 Q4 (right panel of Chart 2.10). After adjusting for pension entitlements, the saving ratio increased to 6.5%, its highest level since 1997, excluding the pandemic period.

The increase in the saving ratio will in part have reflected tighter monetary policy, which incentivises a higher degree of saving. The latest Bank/NMG survey suggests that increases in reported savings have been driven by households in the highest income quintile, where the dissaving effects of higher costs of living and mortgage payments are being partially offset by more attractive interest rates on savings products. Higher saving rates may also reflect greater precautionary saving against the risk of future unemployment, or some households rebuilding the savings that they used as a buffer when their incomes were squeezed.

Consumer confidence has been on an upward trend during most of the past year. In April, the GfK consumer confidence balance for households’ expectations of their financial situation in the coming 12 months rose back towards its historical average (Chart 2.11). This chimes with the findings from the latest Bank/NMG survey, in which respondents were more optimistic about their financial prospects and expected real income growth, with the improvement led by mortgagors and higher-income households.

There are increasing signs of the continuing recovery in real incomes and improving consumer confidence feeding into higher spending. Retail sales volumes grew by 1.9% in 2024 Q1, more than reversing the 1.0% decline seen in 2023 Q4 and taking sales back to the levels seen last summer. Similarly, output among consumer-facing services has grown by 0.5% since December.

Overall, household consumption is now expected to rise by around ¼% in both Q1 and Q2. This would be consistent with the rate of saving remaining high, but with a boost to real incomes from the continued unwinding of the previous external cost shocks as well as the recent loosening in fiscal policy, principally through lower National Insurance contributions. Real post-tax labour income is now expected to grow by over 3% in 2024 as a whole (left panel of Chart 2.10).

…and housing market activity is beginning to pick up…

Higher incomes and improved sentiment among households are also likely to be supportive of the housing market. The official ONS house price series suggests prices have been broadly flat over the past year (Chart 2.12). However, timelier indicators point to some pick up in the months ahead.

Housing investment has been limited by the effects of tighter monetary policy, although the transactions-related component is expected to recover in coming months. The declines recorded last year were led by falls in the larger dwellings investment component of housing investment, although transfer costs associated with property transactions also fell. Continuing weakness in construction indicators suggests that dwellings investment will remain subdued, with the Agents’ contacts only expecting to see modest growth returning later in the year. The more recent pickup in mortgage approvals (Section 2.2) should, however, translate to higher housing transactions. The monthly RICS balances for new buyer enquiries and instructions to sell have also recently returned to positive territory, indicative of increased activity within the housing market.

…although prospects for business investment remain subdued.

Business investment increased by 1.4% in 2023 Q4, partially reversing a sharp decline in the previous quarter. Overall, business investment grew by 5½% in 2023, with growth being predominantly accounted for by the transport equipment sub-component. Respondents to the DMP Survey have indicated that investment was 7% lower than it would otherwise have been owing to the effects of higher interest rates, with weakness likely stemming from a mix of higher direct financing costs and wider reductions in demand leading to lower required investment. Respondents expected only small additional effects from interest rates on investment this year. Surveys and intelligence from the Bank’s Agents point to modest expectations for business investment growth over the coming year. Contacts report that financial pressures, subdued demand and uncertainty continue to weigh on investment.

There are concerns surrounding the latest LFS labour market statistics.

Given concerns about lower achieved sample sizes leading to greater volatility, the ONS recommends caution when interpreting the latest LFS data (Box D). The ONS suspended the publication of the LFS data last summer (aqua lines in Chart 2.13) and began to publish experimental estimates (orange lines) until the LFS was reinstated in February 2024 (purple lines). In addition to overwriting the previous experimental estimates for the recent past, the LFS data have been reweighted to reflect more up to date population estimates.

The latest LFS statistics appear to suggest that the unemployment rate has increased over the past year, but that there is no longer much sign that the inactivity rate has improved over the same period (Chart 2.13). The counterpart to these movements has been a downward drift in the LFS employment rate, consistent with only modest increases in employment growth owing to increases in the population.

Not least given the considerable uncertainties around the LFS data, however, the MPC continue to monitor a broader set of indicators of labour market developments. Overall, the MPC judges that the labour market continues to loosen but remains relatively tight by historical standards (Section 3).

Employment growth has slowed…

A broad range of indicators corroborate the view that employment growth has slowed over recent quarters (left panel of Chart 2.14). Other official estimates have, however, tended to grow at a higher rate than in the LFS. Whereas the LFS implies that employment has only grown by 0.6% since 2019 Q4, the Workforce Jobs and HMRC payrolls data point to growth having been closer to 4% over that period (right panel of Chart 2.14).

Continued positive employment growth would be consistent with some businesses having smoothed through the weakness in activity last year by maintaining headcounts in the expectation of a subsequent pickup. In that case, the more recent rise in business activity need not be matched by a concurrent improvement in employment, as firms first utilise their existing workforce more intensively. Indeed, taken together, the latest data suggest that underlying employment growth will remain subdued in the near term.

The drop in participation apparent in the latest LFS estimates is very different to the path that was estimated previously (right panel of Chart 2.13). The LFS participation rate has declined precipitously since last May, to its lowest level since 1998, in contrast to signs of a recovery in the previous data vintage. As participation is an individual choice rather than an administrative category, monitoring it usually relies on asking people their preferences directly through surveys, with the LFS by far the most prominent such survey. Broad estimates can be derived indirectly, however, by taking a view on other labour market quantities and inferring participation as a residual to reconcile these. If employment growth has been as firm as implied by some other indicators including the PAYE RTI or Workforce Jobs data (right panel Chart 2.14), while the unemployment rate has been flat or rising a little, then the participation rate may well be significantly higher than currently estimated. That ambiguity speaks to the degree of uncertainty around the LFS data at present (Box D).

Wage growth has fallen to around 6% and is expected to ease further.

The ONS measure of annual private sector regular AWE growth declined from 6.6% in the three months to November to 6.0% in the three months to February. This was close to, albeit a little above, expectations at the time of the February Report. The general steer from other indicators also points to a continued easing in pay growth, to around 5%–6% more recently. Those indicators imply a more gradual decline than seen in the AWE data, from a lower implied peak last summer (Section 3).

…and is projected to fall to around 2% in 2024 Q2 before picking back up slightly during the second half of the year.

CPI inflation is expected to fall towards 2% in April and to remain close to that rate in May and June (Chart 2.16), broadly as expected at the time of the February Report. The anticipated decline in April largely reflects base effects dropping out of the annual calculation for non-energy components and a fall in the Ofgem energy price cap from £1,928 to £1,690. In the Spring Budget, the Government extended the 5p per litre cut in fuel duty that was due to end in April and cancelled the planned inflation-linked increase, which also push down on the projection for inflation relative to the February Report forecast.

Inflation is then projected to rise back above 2% in 2024 Q3 and to 2.6% in Q4. The profile over the second half of the year is accounted for largely by energy price base effects, reflected in the orange bars in Chart 2.16 becoming less negative, and remains close to the February Report forecast. CPI inflation excluding energy is expected to be more stable, at around 3%, reflecting still elevated services inflation.

Core goods and food price inflation are expected to continue to ease in the near term.

Inflationary pressures from external cost shocks have dissipated over the past 18 months or so, with their effects particularly evident in goods prices (Section 3). The MPC now judges that a greater proportion of the pass-through of higher import prices into consumer prices has occurred already, relative to the assumptions incorporated into previous inflation projections (Section 1.2). Goods price inflation has fallen from a peak of close to 15% in late 2022 to around ¾% in March and is expected to be negative in coming months. Energy price inflation has been negative since mid-2023, and food and core goods price inflation have also slowed to 4% and 1.5%, respectively, in the latest data for March, considerably below their recent peaks. Both core goods and food price inflation are expected to continue to weaken over the forecast, with food inflation around 1% and core goods inflation hovering at just above zero by September. 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.

Services inflation is expected to ease more gradually, and to remain elevated.

Indicators of inflation expectations for both households and firms continue to moderate.

Households’ one year ahead inflation expectations continued to ease in the latest YouGov/Citigroup survey for April, to 3.3%, dipping slightly below the longer-term measure, which remained close to its historical average (Chart 2.17). The proportion of respondents expecting inflation to be as high as 6% or more on average over the medium term has fallen significantly from its peak in 2022 but remains above its pre-pandemic share. The latest quarterly Bank/Ipsos Inflation Attitudes Survey for February showed a similar picture of lower expectations for the year ahead and a more stable view in the medium term. Households’ median inflation expectations eased to 3.0% one year ahead, and were 3.1% at the five-year horizon, with both figures close to their past averages.

In the DMP Survey, business expectations for CPI inflation one year ahead continued to ease from just under 4% in the three months to January to 3.1% in the three months to April (Chart 2.17). Over the same window, firms expected their own prices to rise by 4.0%, down from 4.3% in January, and for CPI inflation to increase by 2.7% over a longer horizon of three years.

A measure of markets’ medium term, five year ahead inflation compensation based on swap prices has increased a little since the February Report to just under 4%, albeit remaining around ½ percentage point below its 2022 peak. Meanwhile, the median respondent in the latest Market Participants Survey expected CPI inflation to be 2.2% one year ahead, unchanged from March (Chart 2.17). Median five year ahead expectations remained stable at 2%, although with the distribution skewed to the upside.

3.1: Why is inflation persistence important?

As monetary policy affects inflation with a lag, policy needs to be forward-looking and focus on the more persistent implications of a shock.

Declining external cost pressures have been more evident in goods than in services price inflation.

Given their nature, the effects of the external shocks have been particularly significant for goods prices. Goods CPI inflation was close to 15% at its peak in 2022. Within that, core goods inflation peaked at around 8% (left panel of Chart 3.2). In recent months there has been some flattening off in seasonally adjusted food and core goods prices, mirroring developments in producer input prices with a lag (Chart 3.1). Indeed, the three-month on three-month annualised seasonally adjusted measure for core goods inflation dipped into negative territory in October 2023 and has remained very weak since (right panel of Chart 3.2). Based on these recent developments in producer and consumer goods prices, the MPC now judges that the estimated pass-through of past increases in import prices has been faster than anticipated in previous inflation projections. As a result of this change in judgement, external inflationary pressures on headline inflation are likely to be somewhat weaker than previously assumed going forward, particularly during the first half of the forecast period (Section 1.2).

The contribution to headline CPI inflation from services took longer to build following the initial shocks and is also proving to take longer to unwind. Services inflation fell to 6.0% in March from a peak of 7.4% last summer (left panel of Chart 3.2). The three-month on three-month annualised seasonally adjusted services inflation rate has also continued to decline to around 4% in March (right panel of Chart 3.2), suggesting that the annual rate could continue to recede. However, this rate remains above past averages, which could point to some degree of intrinsic persistence being embedded in services inflation (Section 3.3).

Movements in vacancy and unemployment rates can be compared over time using an economic relationship known as the Beveridge curve (Chart 3.5). This tends to show a natural comovement where higher levels of the unemployment rate are associated with lower levels of the vacancy rate, illustrated in the downward sloping purple line in the chart representing the labour market between 2002 and 2019.

This relationship broke down during the pandemic, but is showing some signs of normalising. Although the job vacancy rate remains high, it is now close to where we might expect given the current level of unemployment. As such, any further loosening in the labour market may reveal itself more through higher unemployment as opposed to fewer vacancies. In the MPC’s latest projection, the unemployment rate increases gradually to around 4¾% by the middle of 2025 (Section 1.2).

Wage growth and inflation expectations

Falling inflation expectations and the loosening in the labour market have contributed to lower wage growth.

Annual private sector regular average weekly earnings (AWE) growth slowed to 6.0% in the three months to February, down from a peak of 8.2% in mid-2023.

The official AWE measure of pay growth has been volatile over recent quarters but estimates of underlying pay growth also show that wage growth has been slowing. The AWE measure is derived from the ONS’s Monthly Wages and Salaries Survey. This is a survey of businesses and has not been affected by the fall in response rates in the LFS (Box D). Nevertheless, this series tends to be volatile with recent movements being larger than normal. That makes drawing strong conclusions from single data points difficult. Chart 3.6 compares AWE growth to two alternative measures of underlying pay growth: one based on trends within and across different sectors of the economy (the purple line) and one based on a statistical combination of alternative measures of pay growth (the orange line). Both measures of underlying pay growth suggest that pay growth has slowed since the peak but remains elevated at 5%–6%.

Models estimated by Bank staff suggest that falling inflation expectations and the loosening in the labour market have contributed to that slowdown in wage growth (Chart 3.7). Based on these models, high short-term household inflation expectations were estimated to be adding close to 5 percentage points to private sector wage growth at their peak. Similarly, the tightness in the labour market was adding around 2 percentage points to wage growth in late 2022. The contribution from these factors to current wage growth is projected to fall to around 3 percentage points in 2024 Q2. This remains above the typical contributions during 2018–19 of around 2 percentage points from inflation expectations and little impact from slack.

Average expectations for businesses’ own price inflation from the DMP Survey have fallen back but remain elevated, in contrast to household inflation expectations. These expectations have tended to be a reasonable guide to firms’ subsequently reported realised price changes over the relatively short history of the DMP Survey. In turn, businesses’ reported own output price inflation has broadly matched CPI inflation outturns over the past few years when excluding the direct effects of energy (Chart 3.9). The latest survey results show that, on average, businesses expect their own prices to rise by around 4% over the coming year. Within that, there is evidence that businesses more exposed to the effects of higher interest rates are expecting to raise prices by less than the average, consistent with monetary policy helping to anchor expectations and reduce inflationary pressures more generally.

Second-round effects from past inflation are expected to take longer to unwind than they did to emerge, contributing to more persistently high wage growth.

An alternative indicator of price pressures is the share of prices which are changed in any given month. Prior to the pandemic, a broadly stable share of services prices increased and decreased each month (Chart 3.12). Following the pandemic and energy price shocks, the share of services prices, excluding catering and accommodation, which increased each month close to doubled, while price cuts remained less frequent. More recently, the share of prices which are increased has stabilised but at a level far above pre-pandemic norms.

Elevated pay growth has contributed to high services price inflation, and given lags in pass-through to prices, that is set to continue in the near term.

To understand the potential future path of services price inflation, it is important to understand what has driven its current high rate. Chart 3.13 provides a breakdown from Bank staff analysis, based on a simple model utilising the correlation between current and past levels of services price inflation, pay growth and other input costs, represented by producer prices. Pay growth tends to be associated with services price inflation with a lag. Therefore, despite the recent moderation in pay growth, the model estimates suggest pay will continue to be the biggest upward contributor to services price inflation in the near term.

3.4: The MPC’s forecast for inflation

In the MPC’s latest modal projection, CPI inflation is expected to return to around the 2% target throughout 2024 Q2 before rising slightly in the second half of the year (Section 2). This pickup is driven by energy price inflation, which is projected to become less negative during Q3 and Q4 compared with Q2. CPI inflation excluding energy is projected to be around 3% during the second half of the year, owing to the persistence of domestic inflationary pressures. Assuming interest rates evolve in line with market expectations, CPI inflation is projected to fall back to 1.9% in two years’ time and to 1.6% in three years (Section 1).

There remain considerable uncertainties around the medium-term outlook for CPI inflation. The Committee has considered a range of analysis by Bank staff concerning the persistence of inflation in wages and domestic prices, some of which is set out in this section. The Committee continues to judge that second-round effects in domestic prices and wages will take longer to unwind than they did to emerge (Key judgement 3 in Section 1.2). However, the best collective judgement of the Committee is that these second-round effects are likely to fade slightly faster than assumed previously, pushing down on the latest CPI inflation projection during the third year of the forecast period.

This annex reports the results of the Bank’s most recent survey of external forecasters. Responses were submitted in the two weeks to 26 April 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.

GDP over the four quarters to 2025 Q2 was expected to rise by 1.1%, with four-quarter growth increasing to 1.4% in 2026 Q2 and remaining at that rate in 2027 Q2, on average (left panel of Chart A). The average external forecast is above the MPC’s modal projections for 2025 Q2 and 2026 Q2, of 0.9% and 1.2% respectively, and below the MPC’s projection for 2027 Q2, of 1.6%.

The unemployment rate was, on average, expected to be 4.4% in 2025 Q2, below the MPC’s projection of 4.6% (middle panel of Chart A). External forecasters then expected the unemployment rate to fall to 4.3% and 4.2% in 2026 Q2 and 2027 Q2 respectively. By comparison, the MPC’s projection increases to 4.8% in 2026 Q2 and remains around that rate in 2027 Q2.

CPI inflation was expected to fall to 2.2% in 2025 Q2, below the MPC’s projection of 2.6% (right panel of Chart A). The average forecasts for 2026 Q2 and 2027 Q2 were broadly in line with the 2% target at 2.1% for both periods. By contrast, the MPC’s modal projections are 1.9% and 1.6% in 2026 Q2 and 2027 Q2 respectively.

Chart A: At the three-year horizon, external forecasters expected four-quarter GDP growth to be 1.4%, the unemployment rate to be 4.2%, and CPI inflation to be 2.1%

Projections for GDP, the unemployment rate and CPI inflation