BANK OF JAPAN
The
At its meeting ending on
Since the MPC's previous meeting, market-implied paths for advanced economy policy rates have shifted up. In
Having declined through the second half of last year,
The fiscal measures in Spring Budget 2024 are likely to increase the level of GDP by around 1/4% over coming years. As the measures will probably also boost potential supply to some extent, the implications for the output gap, and hence inflationary pressures in the economy, are likely to be smaller.
Reflecting uncertainties around the
Twelve-month CPI inflation fell to 3.4% in February from 4.0% in January and December, a little below the expectation in the February Monetary Policy Report. Services consumer price inflation has declined but remains elevated, at 6.1% in February. Most indicators of short-term inflation expectations have continued to ease.
CPI inflation is projected to fall to slightly below the 2% target in 2024 Q2, marginally weaker than previously expected owing to the freeze in fuel duty announced in the Budget. In the February Report projection, CPI inflation was expected to increase slightly again in Q3 and Q4, accounted for by the direct energy price contribution to 12-month inflation. Services price inflation is expected to fall back gradually.
The MPC's remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the
At this meeting, the Committee voted to maintain
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
Minutes of the
1: Before turning to its immediate policy decision, the Committee discussed: the international economy; monetary and financial conditions; demand and output; and supply, costs and prices.
The international economy
2:
3: Euro-area GDP had been flat in 2023 Q4, in line with the February Report projection. Near-term indicators such as PMIs and industrial production had continued to stabilise, but the recovery was somewhat weaker than had been expected. By contrast, US GDP had grown by 0.8% in the fourth quarter, higher than had been anticipated in the February Report. US growth was expected to slow in 2024 Q1, following a weakening in real private consumption and retail sales growth since the start of the year.
4: In
5: Despite the conflict in the
6:
7: Headline and core consumer price inflation had continued to trend down in the euro area and
8: The Committee discussed some factors that might influence the global long-term real equilibrium interest rate. Factors that had previously been operating, such as demographics, were likely to continue to bear down on the long-term real rate. Increased investment into climate transition technologies or artificial intelligence, driven for example by expectations of higher productivity growth, might be raising the long-term real equilibrium interest rate. Sustained increases in fiscal spending could also have an impact. The Committee would continue to discuss these factors.
Monetary and financial conditions
9: Since the Committee's previous meeting, the market-implied paths for policy rates across major advanced economies had shifted up. Corporate bond spreads had, however, narrowed and equity prices had risen, leaving mixed signals on the direction of the overall change in financial conditions.
10: Following significant falls in market expectations of policy rates in December and January, recent stronger than expected economic data, particularly non-farm payrolls and inflation releases in
11: In line with market expectations, the
12: In the
13: The Committee discussed the increasing convergence and correlated movements in recent months between market expectations for the
14: While quoted mortgage rates had increased somewhat since the Committee's previous meeting, largely reflecting pass-through of increases in risk-free reference rates, they had remained substantially below the levels reached last summer. The availability of secured lending to households had improved slightly in the latest
15: The annual growth rate of aggregate sterling broad money had decreased from -0.3% in December to -1.6% in January, driven by volatility in the holdings of the non-intermediate other financial corporations sector, but had remained slightly above the previous six-month average of -1.8%. Within that, annual growth in household deposits had, however, continued to rise.
Demand and output
16:
17: Monthly GDP had risen by 0.2% in January, to its highest level since
18: GDP and market sector output growth were both expected to pick up and be positive over the first half of the year. The flash
19: Although consumption had been weaker than expected over 2023, there had been some early signs of a gradual recovery. Retail sales volumes had been volatile but had risen by 3.4% in January following a 3.3% decline in December. Intelligence from the Agents suggested that consumption growth was likely to remain weak in 2024 Q1 but to improve thereafter. GfK consumer confidence had been broadly stable over recent months, with the future personal financial situation sub-balance remaining only slightly below its long-run average. The number of mortgage approvals for house purchases had risen in January to its highest level since
20: The Spring Budget 2024 had taken place on 6 March, accompanied by an Economic and fiscal outlook from the
Supply, costs and prices
21: Reflecting uncertainties around the
22: The ONS had released updated LFS estimates in February but had advised caution in interpreting the results owing to low sample sizes. These estimates also did not reflect the most recent migration and population data. The LFS unemployment rate was estimated to have fallen over the past six months, to 3.9% in the three months to January. Other indicators, such as the claimant count and Agents' intelligence on recruitment difficulties, pointed to a flat or slightly rising profile of unemployment. The vacancies-to-unemployment ratio had remained slightly above its 2019 Q4 levels.
23: The collective steer from a range of measures pointed to modestly positive quarterly employment growth, in line with the February Monetary Policy Report projections. The Committee noted that employment growth had been relatively resilient in an environment of subdued activity, suggesting that companies were potentially retaining their existing employees to meet future increases in demand. This was also consistent with Agents' intelligence. The Committee would monitor whether or not this retention would restrain any tightening in the labour market as GDP growth picked up.
24: Against the backdrop of easing labour market tightness and receding inflation expectations, most indicators of pay growth had declined, although they had remained elevated. Annual private sector regular Average Weekly Earnings (AWE) growth had been 6.1% in the three months to January, 1.1 percentage points lower than in the three months to October and broadly in line with the February Report projection. AWE had moved increasingly into line with other measures such as median private sector pay growth derived from HMRC payrolls data.
25: The Committee discussed the degree of persistence in wage growth. Some shorter-term measures of wage growth had eased, such as an underlying measure based on a range of pay indicators which had been running at a three-month on three-month annualised pace of around 5%, and suggested a moderation in inflationary persistence. On the other hand, adjusting AWE data on a CPI-weighted basis indicated that pay growth could be moderating at a slower pace than the headline data were suggesting. Some forward-looking indicators also pointed to slower moderation. Expectations for future wage growth from the
26: Twelve-month CPI inflation had fallen to 3.4% in February from 4.0% in January and December, a little below the expectation in the February Report. The latest CPI release had triggered the exchange of open letters between the Governor and the Chancellor of the Exchequer that was being published alongside these minutes. The decline in CPI inflation over recent months could largely be attributed to falls in food and core goods price inflation, as external cost pressures had continued to abate. Services price inflation had declined but remained elevated.
27: Energy prices had continued to drag on annual CPI inflation. Despite the 5% rise in the Ofgem price cap in January, energy was expected to continue to contribute negatively to CPI inflation over the next six months owing to the upcoming reduction in the price cap from April. The freeze in fuel duty announced in the Budget would provide a further marginal drag compared to the February Report projections.
28: Core goods price inflation had fallen to 1.9% in February, slightly lower than expected in the February Report, as cost pressures from previous shocks and global goods price inflation had continued to dissipate. Food and non-alcoholic beverages inflation had also fallen, to 5.0% in February from 6.9% in January. The level of producer input and output prices for both core goods and food had receded significantly from their previous peaks over the past year and had then flattened, while Agents' contacts similarly anticipated falling or flat input costs.
29: Services price inflation had remained higher than CPI inflation, at 6.1% in February, a decrease of 0.4 percentage points from January and in line with February Report expectations. Higher-frequency services price measures that excluded components that were not typically reliable indicators of trends in inflation persistence, such as non-private rents, accommodation and airfares, had risen by around 41/2% on a three-month on three-month annualised basis. The moderation of services price inflation in recent months appeared to have been accounted for largely by weakness in non-labour rather than labour costs.
30: Households' median short-term inflation expectations had continued to ease in the
The immediate policy decision
31: The MPC sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment.
32: In the MPC's February Monetary Policy Report projections, GDP growth had been expected to pick up gradually during the forecast period. CPI inflation had been expected to fall temporarily to the 2% target in 2024 Q2 before increasing again in Q3 and Q4, to around 23/4%. Conditioned on the market-implied path for
33: Since the MPC's previous meeting, market-implied paths for advanced economy policy rates had shifted up, including in the
34: Having declined through the second half of last year,
35: Twelve-month CPI inflation had fallen to 3.4% in February from 4.0% in January and December, a little below the expectation in the February Report. Services consumer price inflation had declined but remained elevated, at 6.1% in February. Higher-frequency measures of core services inflation, such as the three-month on three-month annualised rate, had been around 41/2%. Most indicators of short-term inflation expectations had continued to ease. Although still elevated, nominal wage growth had moderated across a number of measures. An underlying measure based on a range of pay indicators had been running at a three-month on three-month annualised pace of around 5%. Contacts of the Bank's Agents continued to expect some decline in pay settlements this year and to report greater difficulty in passing on cost increases to prices. CPI inflation was projected to fall to slightly below the 2% target in 2024 Q2, marginally weaker than had previously been expected owing to the freeze in fuel duty announced in the Budget.
36: The MPC's remit was clear that the inflation target applied at all times, reflecting the primacy of price stability in the
37: Monetary policy would 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 had judged since last autumn that monetary policy needed to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipated. The Committee recognised that the stance of monetary policy could remain restrictive even if
38: Eight members judged that maintaining
39: There was a range of views among these members on the extent to which the risks from persistent inflationary pressures had receded. At one end of this range, developments in nominal indicators, including at higher frequencies, suggested that the restrictive stance of policy and the unwinding of second-round effects associated with declining short-term inflation expectations were having a material impact in reducing the more persistent and slower-moving components of inflation. At the other end of this range, wage growth remained too high and was expected to moderate only slowly, as reflected in the Agents' latest intelligence. There were limited signs so far that services price inflation would return to a target-consistent pace sufficiently rapidly, with evidence of diminishing second-round effects still tentative. Some upside risks remained around both the wage and CPI inflation projections.
40: For all of these members, a further accumulation of evidence on inflation persistence would be required to warrant a shift in the monetary policy stance, with members differing on the extent of evidence that was likely to be needed. They would continue to consider the degree of restrictiveness of policy at each meeting.
41: One member preferred a 0.25 percentage point reduction in
42: The MPC remained prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably. It would 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 would keep under review for how long
43: The Chair invited the Committee to vote on the proposition that:
44: Eight members (
Operational considerations
45: On 20 March, the total stock of assets held for monetary policy purposes was
46: The following members of the Committee were present:
Catherine L Mann
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