This statement provides information that has become available since the staff report was issued to the Executive Board on June 17, 2024. The thrust of the staff appraisal remains unchanged.
1. As widely expected, inflation in May (released on June 19) fell to 2 percent, the Bank of England’s (BoE’s) inflation target. Headline inflation declined from 2.3 percent y/y in April to 2 percent in May on the back of favorable energy price base effects and easing goods prices. Core inflation also fell by 0.4 ppts, but remains elevated at 3.5 percent. Services inflation—a key measure of inflation persistence—eased by less than expected, from 5.9 percent in April to a still high 5.7 percent (consensus and BoE expectations were 5.5 percent and 5.3 percent, respectively). The strength of services inflation was, however, in part driven by private rents and transport services, including airfare, which tend to be volatile. Thus, overall, the outturn remains consistent with gradually declining underlying inflationary pressures.
2. Against this backdrop, on June 20, the BoE’s Monetary Policy Committee (MPC) kept Bank Rate at 5.25 percent. As in the May MPC meeting, seven members voted to keep the rate unchanged, while two voted for a 25 bps cut. However, the decision summary noted that for some of the seven members who voted for a hold, the decision was “finely balanced.” The meeting minutes stated that the MPC will “continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole” and prepare to adjust monetary policy to ensure a sustainable return to the inflation target. Markets scaled up expectations for rate cuts to 50 bps in 2024 (44 bps before the meeting), with the odds of an August rate cut priced at 58 percent (34 percent before the meeting).
3. The foregoing is broadly in line with staff’s forecast and monetary policy assumptions and advice. The May inflation outturn has narrowed the band around staff’s forecast of 2.1 percent 2024Q2. While continuing to see underlying pressures ease, staff still forecasts headline inflation to rise to around 2.5 percent later this year, as favorable energy price base effects abate, before durably returning to the 2 percent target in the first half of 2025. The MPC rate decision, similarly, is consistent with staff’s baseline assumption of 50 bps rate cuts in 2024. Staff continues to see rate cuts of 50–75 bps rate cuts in 2024 as appropriately balancing the risks of premature vs. delayed easing, while supporting the MPC’s meeting-by-meeting approach, given uncertainties.