Bank of England press conference — 1 August 2024

What this says

today we've cut Bank Rate by 0.25 percentage points to 5%. It was a finely balanced decision.

But it does add to the risk that inflation could be higher than we expected if we cut interest rates too much or too quickly. And despite easing services, price inflation and domestic inflationary pressures do remain elevated.

We need to be careful not to cut rates too much or too quickly, all the while monitoring the evidence on how inflationary pressures are evolving.

Or are we experiencing a more permanent change to wage and price setting, which would require monetary policy to remain tighter for longer?

There is, however, an alternaƟve account of the economy, which is less benign than our most likely projecƟon. And this account reflects a view that MPC members put some weight on to, albeit to different degrees, when reaching their conclusions on the appropriate degree of restricƟveness in monetary policy.

the Monetary Policy CommiƩee voted to cut Bank Rate by 0.25 percentage points to 5%.

CPI inflaƟon has fallen markedly over the past year back to the 2% target. The impact from past external shocks has abated and the risks of persistently high inflaƟon have moderated.

Monetary policy will need to remain restricƟve for sufficiently long unƟl the risks to inflaƟon remaining sustainably around the 2% target in the medium term have dissipated further.

But if you do a very simple back of the envelope on the increment to public sector pay that the Chancellor announced, let's say increment, because obviously there is an assumption already in there. Going back to the budget earlier this year, the proverbial back of the envelope suggests an increment in inflation space, which is very small.

I think, you know, policy is above a neutral rate at this point, and we would see it gradually coming down as this degree of degree of inflation persistence comes out.

we felt that at this point, when we made this change in policy, it was appropriate to give something more of a framework within it described the framework that we're looking at

the third one is saying, look, we've been through these huge shocks, particularly Covid. Has this caused structural changes in the economy, which we, of course, then have to take into account in the way we think about policy now

The next step in this process now is obviously the budget on the 30th of October, because what we had this week was obviously a statement nut it needs to be sort of, in a sense, fully filled in as the Chancellor said

we've seen wage growth very much following that projection that we had at the time of the May forecast. It's come down to 5.6% in the latest three months and for private sector regular wages. And that was our forecast.

That Bank Rate, has been cut today.

the path of unemployment that we now have in this, in this report is a lot shallower than two things. One is paths we had in the past. Two is history.

The other is where restricƟon does have some impact via an output gap, which does cause some, you know, put some added weight onto the sort of onto the restricƟveness of monetary policy to get this persistent inflaƟon point out.

the degree of restricƟveness that we've sƟll got, I think everyone on the commiƩee sees that as necessary to squeeze the persistent part of inflaƟon to ensure that inflaƟon stays sustainably at target.

The mean path is actually much nearer, much nearer to target.

I think it's reasonable to say that it's unlikely that we are going back to the world we were in between 2009, actually post the financial crisis and the point at which we started raising rates. And the reason for that is that that world was really driven by very big shocks... it's much more likely, it seems to me, that we're going back to a world... where we will be somewhere around whatever the neutral rate turns out to be, which let me say, it's reasonable to say is lower than we are at the moment because we're describing policy as restrictive, but it's higher than we were between 2009

But I have, you know, there's always a but I think we have to be very vigilant on this front. I think we decided that the risk, the skew that we had in the forecast, you know, up till now since those events started, we wouldn't retain because of the fact that we haven't seen the signs of it emerging. But I don't for a moment want to give you the impression that means we're not very vigilant about this because, as you rightly said, things can change very quickly.

I'm not going to tell you what it means because we don't know at this stage... each member of the committee will give somewhat different weights to those three parts to the framework

we think that, our central estimate has had about a 0.1% impact on long term interest rates. It could be as much as 0.2, but those are pretty small numbers

Transcript

KaƟe MarƟn Hi everyone. Welcome to the August Monetary Policy Report press conference. We're joined today by Clare Lombardelli, deputy governor for monetary policy, Dave Ramsden, deputy governor for markets and banking, and the governor, Andrew Bailey. Andrew, we'll start with opening remarks and then we'll turn to quesƟons. Andrew Bailey Well, thank you, KaƟe. And can I start by welcoming Claire to her first MPL press conference? So today we've cut Bank Rate by 0.25 percentage points to 5%. It was a finely balanced decision. InflaƟon has been exactly on our 2% target for two consecuƟve months. And inflaƟonary pressures in the UK economy have eased much as expected. It’s nice to have music when I said that thanks, but this is very welcome news as the as the music suggested. Now at the same Ɵme, the UK economy has been stronger in recent months, and this is very welcome too. But it does add to the risk that inflaƟon could be higher than we expected if we cut interest rates too much or too quickly. And despite easing services, price inflaƟon and domesƟc inflaƟonary pressures do remain elevated. So, we need to make sure that inflaƟon stays low. We need to put the period of high inflaƟon firmly behind us. And we need to be careful not to cut rates too much or too quickly, all the while monitoring the evidence on how inflaƟonary pressures are evolving. And the best and most sustainable contribuƟon that monetary policy can make to growth and prosperity is to ensure low and stable inflaƟon, and an economy where people can plan for the future with confidence and in which money holds its value. And we have truly come a long way in returning inflaƟon to target. Chart one, which just come up shows the development of 12-month consumer price inflaƟon since 2019. That's the white line. InflaƟon has fallen significantly from its peak over the past year alone. It's fallen from nearly 8% in June last year to 2% in the latest data for May and June, and we expect consumer and price inflaƟon to edge up again in the second half of the year, perhaps to around 2.75%. You can see that in the shaded area, but we then expect inflaƟon to revert towards the 2% target over the next year. Now, under the surface, the decline in the headline number has been driven by lower goods price inflaƟon as reflected in negaƟve contribuƟons from energy prices.

That's the orange bars and fading contribuƟons from food and other goods that's purple and blue on the chart. As the effects of lower energy prices fade over the coming months, more of the headline inflaƟon number will be driven by services price inflaƟon. That's the yellow bars. So, the stories behind the headline inflaƟon numbers really only emerge as we dive deeper into price developments for goods and for services. The story on energy prices is worth repeaƟng. AŌer sharp rises following the start of the war in Ukraine, household energy prices fell significantly in the second half of last year, with large declines in the Ofgem price caps. These declines are currently pulling down on the annual measure of inflaƟon. In the latest number for June, household energy price inflaƟon was -27%. With a weight of 4% in the consumer price index, that currently subtracts about a percentage point from headline inflaƟon. Now, as last year's declines drop out of the annual comparison over the rest of this year, this negaƟve contribuƟon from household energy prices will fade, and that's the main reason why we expect headline inflaƟon to edge up in the coming months. As chart two shows, core goods price inflaƟon has also fallen sharply over the past two years. That's the orange line and we expect it to remain muted in the coming months. Again, that's shown in the shaded area. These are goods traded in internaƟonal markets and with supply chains restoring themselves and signs of deflaƟon. DeflaƟon emerging in some key supplier countries, most notably China. Global goods price inflaƟon should help keep goods price inflaƟon low for UK consumers. By comparison, services price inflaƟon that's the blue line is declining more gradually. The conƟnued strength in services inflaƟon reflects more persistent inflaƟonary pressures in the UK economy. So-called base effects from irregular falls in volaƟle components last year may even cause services inflaƟon to rise slightly in August, before we can expect it to ease again throughout the rest of the year. While goods price inflaƟon has been a liƩle lower than we expected in May, services price inflaƟon has been somewhat higher. As chart three shows. These surprises have come with an upƟck in monthly services price inflaƟon rates, as are in orange, which can be indicaƟve of momentum in price increases over the very near term. Now, much of that strength has been driven by an increase in the components of the services basket that are index linked or regulated. That's in blue, oŌen resulƟng in price rises in the month of April. Monthly services price inflaƟon, excluding these components, along with other volaƟle components such as airfares and hotels have been lower. That's the Purple line, and this may be a beƩer guide to the direcƟon for services inflaƟon over coming months, but we need to watch this carefully.

The Monetary Policy CommiƩee conƟnues to pay close aƩenƟon to services inflaƟon as an indicator of persistence in domesƟc inflaƟonary pressures, along with a range of other economic indicators. But this does not mean that we should adjust our course with every data surprise that comes in. What maƩers for our policy decisions in the is the accumulaƟon of evidence about the medium-term outlook for inflaƟon. What the data adds to our understanding of the underlying dynamics in the UK economy that ulƟmately determine the future path for consumer price inflaƟon. And given the Ɵme it takes for monetary policy to have its full effect, we need to be forward looking in determining how restricƟve monetary policy should be to return inflaƟon sustainably to the 2% target. A further factor in the MPC's assessment is the recent strength in economic acƟvity. GDP growth has been noƟceably stronger than expected over the first half of this year, following a period of weakness in the second half of last year. The commiƩee sees it as most likely that underlying momentum has remained more steady and that the balance between demand and supply has remained stable. This judgment is supported by various indicators, which suggests that capacity uƟlisaƟon and labour market Ɵghtness have moved by much less than the GDP numbers. The job of monetary policy is to squeeze the persistent element of inflaƟon out of the system in a way that is consistent with returning inflaƟon to target on a Ɵmely and sustained basis. That's what we did by increasing Bank Rate to 5.25% and keeping it at that level for a year. That has leaned heavily against second round effects from global inflaƟonary shocks on domesƟc inflaƟon persistence. But we sƟll face the quesƟon of whether the persistence element of inflaƟon is on course to decline to a level consistent with inflaƟon being on target on a sustained basis. And what it will take to make that happen is the decline of persistence, now almost baked in as the global shocks that drove up inflaƟon unwind. Or will it also require a period with economic slack in the UK economy? Or are we experiencing a more permanent change to wage and price seƫng, which would require monetary policy to remain Ɵghter for longer? These have become important quesƟons in the MPC’s policy deliberaƟons. As policymakers, we can have all three cases in our expectaƟons with different weights aƩached to them, and those weights can change over Ɵme. The commiƩees collecƟve, modal or most likely projecƟon of the UK economy is consistent with a relaƟvely benign view of inflaƟon persistence and what it takes from here to squeeze it out of the system and return inflaƟon sustainably to target. As chart four shows in the in this most likely projecƟon, condiƟonal on a market implied path of Bank Rate that declines to 3.5% over the three year forecast horizon. Consumer price inflaƟon falls back to 1.7% in two years’ Ɵme, and to 1.5% in three years. In this projecƟon, second round effects and domesƟc prices and wages are judged to take longer to unwind than they did to emerge, leading to some persistence in inflaƟonary pressures. But against that, a margin of economic slack gradually builds over the forecast horizon, despite the recent pickup

in economic growth. As such, the most likely projecƟon encompasses the first two relaƟvely benign cases that I just described. So the modal projecƟon reflects the commiƩee's collecƟve judgment that we are making good progress in returning inflaƟon to the 2% target sustainably. The progress has become clearly visible in measures of both inflaƟon percepƟons and inflaƟon expectaƟons. These are important determinants of consumer price inflaƟon, given the role they play in wage and price seƫng in the economy. We should expect that percepƟons of current inflaƟon and expectaƟons of future inflaƟon will play into wage bargaining and price seƫng. Chart five gives a snapshot based on the Bank's InflaƟon Aƫtudes Survey of UK households and its Decision Maker Panel survey of UK businesses. Short term household inflaƟon expectaƟons in purple on the leŌ-hand panel have conƟnued to fall alongside the observed decline in consumer price inflaƟon, while medium term expectaƟons in orange remain stable. Household’s percepƟons of the current rate of inflaƟon remain elevated. That's the blue line, but they have fallen sharply and tend to react to headline inflaƟon with a lag. Similarly, firms’ current inflaƟon percepƟons and inflaƟon expectaƟons over the short and medium term have also fallen significantly. That's the right-hand panel. All of this points to a conƟnuing normalisaƟon of wage and price seƫng dynamics that the fall in headline inflaƟon will feed through to inflaƟon expectaƟons and to weaker pay, wage pay and price seƫng dynamics. So even if we judge that second-round effects will take longer to unwind than they did to emerge, the evidence from these indicators is consistent with the view that second round effects will conƟnue to fade with the restricƟve monetary policy stance that we have put in place, and the emergence of a margin of slack in the economy. There is, however, an alternaƟve account of the economy, which is less benign than our most likely projecƟon. And this account reflects a view that MPC members put some weight on to, albeit to different degrees, when reaching their conclusions on the appropriate degree of restricƟveness in monetary policy. This view is that the economy is closer to the third least benign case that I set out earlier, that inflaƟonary pressures have become more ingrained in the UK economy as a result of structural changes in product and labour markets as a lasƟng legacy of the major shocks that we have experienced. One possibility that the commiƩee has considered is that the rate of unemployment, below which inflaƟonary pressures begin to build, may have gone up over recent years. There is also a risk that recent upside news to economic acƟvity could reflect stronger demand relaƟve to supply, in turn increasing inflaƟonary pressures in the UK economy over the medium term. Now we can think of the alternaƟve view as a prototype economic scenario of the kind that Ben Bernanke has recommended in his recent review of our processes, in Ɵmes of high uncertainty. As we develop our response to Doctor Bernanke's recommendaƟons, we will be in a posiƟon to

arƟculate fully such scenarios in the report we present today, giving some weight to an alternaƟve, less benign view of inflaƟon persistence is reflected in an upside risk or skewed to our inflaƟon forecast. The mean path for inflaƟon is higher than the modal or most likely path as a result. Whether we think of the possibility of less benign developments and inflaƟonary pressures as an alternaƟve scenario or as an upside risk, the message is the same. We need to make sure that monetary policy is sufficiently restricƟve for sufficiently long that inflaƟon remains near the 2% target. Now weighing the evidence at this meeƟng, the Monetary Policy CommiƩee voted to cut Bank Rate by 0.25 percentage points to 5%. CPI inflaƟon has fallen markedly over the past year back to the 2% target. The impact from past external shocks has abated and the risks of persistently high inflaƟon have moderated. So, it's now appropriate to reduce the degree of restricƟveness a liƩle to ensure that inflaƟon remains sustainably around the 2% target. But key indicators of inflaƟonary pressures remain elevated, and recent strength in economic acƟvity is added to the risk of more persistent inflaƟonary pressures. And this, of course, gives us pause for thought. Monetary policy will need to remain restricƟve for sufficiently long unƟl the risks to inflaƟon remaining sustainably around the 2% target in the medium term have dissipated further. The commiƩee conƟnues to remain highly alert to the risks of inflaƟon persistence and will decide the appropriate degree of monetary policy restricƟveness at each meeƟng. So with that, Clair, Dave and I will be happy to take quesƟons. KaƟe MarƟn Let's go to Faisal and then Ed, please. Faisal Islam, BBC Thanks, governor. Faisal Islam, BBC news. Other central bank colleagues in Europe have suggested this phrase one and done. It seems to me from the minutes that's not what you're saying, that the door is open for further rate cuts just not necessarily loads of them. And does this delicate balance that you refer to, is it in any way interfered with or interrupted by above inflaƟon, public sector pay seƩlements? Andrew Bailey Sorry, there was the last point above inflaƟon. Faisal Islam Public sector pay seƩlements. Andrew Bailey So on this point about you know, is it one and done or is it more to come? I want to just reemphasize the language partly the language I concluded with actually about commiƩee remaining highly alert to the risks of inflaƟon persistence, and that we will decide, you know, the appropriate degree of restricƟveness at each meeƟng.

And also, just point you to the final paragraph of the monetary policy statement that we've issued today, which essenƟally says a very similar thing, but is, frankly, language that we've used for some Ɵme now, actually. So nothing's changed in that respect. I'm not giving you any view on the path of rates to come. I'm saying we will go from meeƟng to meeƟng, as we always do. And it's this judgment about resilience, because if I can sort of ask a variant myself, a variant of your quesƟon, if you don't mind. I mean, if you said to me, what's changed? The answer is nothing's really changed, actually much in terms of the economic news. It's that we have become more confident and over Ɵme of this path that we've observed for a while now, this path of the effect that the level of restricƟon is having and what it's doing, and we've become sufficiently confident now that we think we can reduce that degree of restricƟons a bit and we will go on making that judgment. So, on the second part of your quesƟon, Faisal, on the news on public sector pay, a couple of things I'll say on that. First of all, the Treasury, obviously we have a Treasury representaƟve who is in the commiƩee when we meet. We were very, very fully and properly briefed on it. A Chancellor and I spoke on it as well. Two things. First of all, we take we take the lead in terms of pay indicators from the private sector, because the private sector pay is feeding through directly into the into CPI. But public sector pay obviously has an effect on demand and it can have a signaling effect. On the whole, I think private sector pay tends to lead public sector pay, and that's what we've been seeing actually if you look in recent Ɵmes. The second point I'll make is if you look at past behavior and you look at the incremental news, and this is a very simple back of the envelope thing. So, you know, we'll get the full story with the budgets obviously, because we haven't got the full story yet because obviously we don't know how this is going to be funded. The Chancellor's got decisions to make on that front. There's a lot of analysis to do. The OBR are starƟng their process. And as you know, we condiƟon our view on of government policy on announced government policies. And that will come with the budget. But if you do a very simple back of the envelope on the increment to public sector pay that the Chancellor announced, let's say increment, because obviously there is an assumpƟon already in there. Going back to the budget earlier this year, the proverbial back of the envelope suggests an increment in inflaƟon space, which is very small. I mean, you're in quite small second decimal place numbers at that point. So, that's the back of the envelope. We'll get a much beƩer story obviously by October the 30th when we get the budget. KaƟe MarƟn Go ahead. Ed Conway, Sky - Thank you. Governor Ed Conway from Sky news. So, you've just cut interest rates, it's a big moment, but one of the things you've menƟoned a couple of Ɵmes is that rates are sƟll in restricƟve territory.

So can you just expand on that a liƩle bit more so that people understand. Does that mean that that they are sƟll likely to feel pain as a result of where interest rates, economic pain as a result of where interest rates are right now, and when can they expect that to change for it not to be in restricƟve territory or for it to be not painful? Andrew Bailey Well, we look at RestricƟveness in terms of I mean, you can look at a number of ways, but let's look at it in terms of where we think growth is relaƟve to potenƟal growth. For instance, in the economy, we obviously had a very small recession at the end of last year. A number of causes, you know, causes of that. We are coming out of that now. But as you see from our forecast for GDP , you know, we've got growth, you know, picking up it's a liƩle bit inconsistent year by year and we've taken a rather sort of measured view, I would say, of the latest news in terms of how it feeds through. But I think that's a path of growth where it suggests that, you know, we're sƟll below potenƟal and we do have a small output gap opening up in the forecast. So I think that's one way of capturing the fact that there is sƟll a restricƟve seƫng in that sense, and we think that's appropriate given I'd have to make this point again, having to ensure that the persistence of inflaƟon is taken out of the system. So that's the way we look at it. You know, we've talked about our star quite a lot and the neutral rate in these press conferences in the past. I think, you know, we don't provide we've never been in really of the view that we should we provide a quanƟtaƟve number on what that is. But I think, as you know, from things that we've published in the past, I think, you know, policy is above a neutral rate at this point, and we would see it gradually coming down as this degree of degree of inflaƟon persistence comes out. So there is yeah, there's a way to go sƟll. And it's consistent with I know you probably say the message I kept giving during my introductory remarks, which is, you know, we've got to monitor this very carefully as to how over what period of Ɵme and under what condiƟons, we can start to, you know, start to release that. And I'm not giving any predicƟons on how that will work through. KaƟe MarƟn Great. Can we go to Sam and then Sue, please? Sam Fleming, Financial Times. Over the past year or so, the Bank has been quite clear in the tests. It's seƫng itself, in a sense, for gauging what policies should do. The focus has been on labour market condiƟons, wage growth and services price inflaƟon. Paragraph 24 [in the MPC Minutes] today slightly broadens this and talks more generally about persistence. Can you talk a liƩle bit about why in a sense you're changing this, this, this language and what we should read into that?

And second of all, you talked again, per the previous quesƟons about not moving too quickly in that context, do you think the market is geƫng ahead of itself and expecƟng another rate cut before the end of the year? Andrew Bailey Well, I'm not going to comment on the market curve because I really rarely do actually. So, the market will take a view and I'm sure the market will be studying carefully what we've done and said today. So that's them. I'll give a view. I'm sure Clare may want to come in on this. I mean, you rightly pick up that we've reposiƟoned things today, and I really am very keen that you sort of take that message away, actually and the reposiƟoning is this and it's sort of hopefully you saw it in the remarks that I just made that the indicators are important the data is obviously important, but we felt that at this point, when we made this change in policy, it was appropriate to give something more of a framework within it described the framework that we're looking at, policy, which I would say really sits above then the data indicators, the data indicators, obviously, if you like, are the evidence that supports the framework, but the data indicators are not the framework themselves. And so I go back to this sort of, you know, trilogy that I set out about, you know, what is this? What is the sort of what are the dynamics at the moment? You know, are we seeing, you know, largely self- correcƟon of these big global shocks and that, that will feed through to then taking the persistence out? You know, I think if you if you put all your sort of, all your chips on that slot, as it were, you would say, well, that's a preƩy benign story, then that's a very good news story. The second intermediate case I set out was, well, actually, no, you get take that, but you also need something of an output gap to open up, so it sort of goes back to Ed's quesƟon, actually about RestricƟveness. You can see that we have got an element of that in the in what we published today. And then the third one is rather different in a sense, but not but not inconsistent. So, say as I said earlier, you can have all three and your weights as it were. But the third one is saying, look, we've been through these huge shocks, parƟcularly Covid. Has this caused structural changes in the economy, which we, of course, then have to take into account in the way we think about policy now, you know, different members put different weights on these. But Clare may want to develop this a bit? Clare Lombardelli Sure. Thanks, Andrew. I mean, as you say, what we're doing here is we're looking at the accumulaƟon of the evidence that we've seen, over recent months, I mean, over, over the year, really, and thinking about how does data and the new data we get fit into that, and how does it fit into that overall picture relaƟve to our expectaƟons? So as the data evolves and what we've seen recently is that it is evolving broadly in line with that expectaƟon, and that gives you more confidence that you're in this world where inflaƟon pressures are inflaƟonary, pressures are reducing.

As Andrew says, we are also conscious of this risk that, you know, we might be in a sort of alternaƟve world where you've got either stronger demand, more acƟvity, or you've seen structural changes in the economy, you know, post the shocks that we've had. And it's really about thinking about how do we think about those risks. How do we factor them into our policymaking? I mean, this is one of the areas that, you know, Ben Bernanke really focused on in in his report, which is and we're puƫng quite a lot of thought into his how do we think about risks? How do we think about uncertainty, and how do we build that into policy making in a way that is sort of useful? Thoughƞul. And that's the work that we're undertaking now thinking about. And you can see sort of here sort of bringing that, you know, doing, doing some of that in what we've done today in talking about this alternaƟve approach, this framework that allows people to sort of think about that balance of risks and as the evidence evolves, as we say, it gives us more certainty we're in one world than the other. But of course, there is uncertainty out there, and that's why we have to keep vigilant. Sue Chan, Telegraph Just another one on public sector pay rises. Rishi Sunak has just tweeted that he is concerned that Labour's inflaƟon - these are his words - InflaƟon busƟng pay deals have put further Bank of England cuts at risk. Does your previous answer suggest that you disagree with that. And just another one on the minimum wage if I may. There's a number of things that businesses are telling your agents on how they're coping with higher minimum wages, such as cuƫng hours and increasing non pay benefits. Does that suggest that there's a sense among businesses that they are reaching the limits of what they can absorb on the minimum wage? Andrew Bailey Well, let me take the two separate quesƟons. Take the first one, I think just go back to what I said before. I think it's now. The next step in this process now is obviously the budget on the 30th of October, because what we had this week was obviously a statement nut it needs to be sort of, in a sense, fully filled in as the Chancellor said, nothing, nothing, nothing, nothing different from what the Chancellor said there. And parƟcularly, obviously, the quesƟon of, you know, of funding and so on, that goes with that. So, we will wait for that news and then we can fully process that, as we always do as announced government policy and see where it comes out. So that's the first one on the NaƟonal Living Wage. I mean, you're correct. And, you know, it's raised and it's in our summary of our agents forecasts that, you know, when I go around, I think when we all go around the country, I go around the country a lot, I mean, the naƟonal living Wage does get raised quite a lot. And we spend quite a lot of Ɵme looking at it. I would say that actually when we look at if you go back to the May forecast. Pay has actually evolved preƩy much exactly as we thought it would back in May. We haven't had any surprises on that front It's coming down quite gradually, but it is coming down. So, we've had no surprises on that front.

So, I think what I take from that is that the effects that the naƟonal living wage that we built in at that point have not, in a sense been contradicted by, by bad news on the upside. We haven't seen that, frankly. You know, we're very you know, we're obviously very vigilant on all that front, but we haven't seen any news that contradicted the view we took at that point. But look, we listen, and I listen and I spend a lot of Ɵme going around the country, and I do listen to what our contacts tell us about that. And by the way, it's that both the naƟonal living wage itself and it's this what they tend to call compression risk that you get, which is of course, is that it does have an effect in a sense, you know, above that because otherwise differenƟals get compressed as a point that firms make very regularly to me. So it is a, you know, it's a point they make and we recognize and we factor into our thinking. Dave Ramsden It's absolutely the case that when you go round doing our agents visits, we get that reporƟng back on the impact of the NaƟonal Living wage. And we flagged it, as Andrew was saying, very much as a risk at the Ɵme of the May forecast, because we didn't know how it was going to land. As we report in in this report, we for the for the reasons Andrew set out we imagined it an esƟmated it would add about 0.3 percentage points to aggregate pay growth. And that looked that looks to be, from what we can see so far it has had what we're describing as a, a small impact so far in aggregate wage growth, so very much in line with expectaƟons. So that's a risk that at least so far hasn't crystalised. We'd incorporated it. And as and as Andrew stressed, we've seen wage growth very much following that projecƟon that we had at the Ɵme of the May forecast. It's come down to 5.6% in the latest three months and for private sector regular wages. And that was our forecast. KaƟe MarƟn Let's go to Ashley and then Phil Inman. Ashley Armstrong, The Sun Hi. Thank you. Obviously this rate cut is good news for borrowers and those with mortgages, but less good news for savers. What we found last Ɵme around, when rates were rising, was that the high street banks were very slow to pass on the benefits of the higher interest rates. Can you now sense who's going to benefit most? Will the savers be hit quicker? Do you think that the banks are being faster to react to what the base rate is doing, or will it be kind of more benefit to the borrowers? And then if I could squeeze in one, about a lot of readers are kind of making big decisions about their lives and their homes and whether to remortgage. What would you tell them if they were trying to make a decision on whether to remortgage now or wait? Andrew Bailey Well, we're rather careful as a Bank of England not to give financial advice Actually, as you'll understand what I would say is this, I mean, if you look at the paƩern, if you look at the sort of path of mortgage rates, let me say a couple of things.

I mean, they are actually now over 1% lower typically than they were this Ɵme last year. And I think what that tells us is that, you know, expectaƟons of where inflaƟon was going to go to have, you know, have, shiŌed. InflaƟon has come down, you know, more rapidly than I think all of us feared this Ɵme last year, in terms of the, the global shocks wearing their way through. And that's obviously good news. Now mortgage look at look at it more immediately. Mortgage rates have also come down, obviously less. Part of that fall I described over the year has actually happened in sort of recent weeks actually. Now, of course, these days with most mortgages being fixed rate over some period of Ɵme, they're at term they're actually essenƟally priced off the swap curve in financial markets. So, they reflect obviously what financial markets think is going to happen to rates. And so, you have seen some easing off, in the last few weeks and month or so. Now we'll see how we see how markets react to the news today. I mean, you know, that will be interesƟng because you might say, well, that move I just described was in some sense sort of discounƟng what markets thought might happen. Because, if you look at pricing, markets have been essenƟally pricing a cut either today or in the September meeƟng. So, you know, they had got that cut priced in. If you look at savings, let me I've said this before, I would draw a disƟncƟon between term deposits and site deposits. So term deposit rates have effecƟvely followed mortgage rates. There may be Ɵming differences immediately that that can happen, obviously. But if you look at the last year, I think you find term deposit rates and mortgage rates have moved preƩy similarly. Site deposits have not moved as much and that's true over the whole period of recent years that the movement of term deposit rates has been larger than site deposit rates. And I've said, I think I've certainly said in the Treasury Select CommiƩee hearings before that one way of raƟonalising that actually, is to switch then to the other side of our sort of acƟviƟes, of the regulatory side. That we now put a lot more value on term deposits rather than site deposits because of the fact they don't run as quickly if they have a problem. And that's reflected in the regulatory liquidity structure and framework and so banks do price them accordingly. I think we're seeing we've been seeing some of that in recent years. Ashley Armstrong For those who might not realise the site deposits are easy access where you can withdraw your money. And term deposits are… Andrew Bailey Term deposits are for a period of Ɵme yea So three months, six months whatever. Dave Ramsden And if I can we put the usual chart in the MPR chart 2.7 on page 38 that that tells the story in a chart that Andrews just told. Obviously, the other thing that was happening with site deposits, instant access, is that, you know, at the Ɵme when interest rates were very low, margins did really get squeezed. And so there was some rebuilding of margins. It's very important that that rebuilding of margins shouldn't go too far, but it was necessary. And so, you know, we'll, we'll certainly be tracking, as we always do, what happens to, both site and term deposit rates. Now, that Bank Rate, has been cut today.

Andrew Bailey Yeah. I don't want to spend my Ɵme promoƟng my own speeches, but the speech I gave at Loughborough University earlier this year goes through that point that Dave's just made in some probably grinding detail that you really don't want to read. But if you do. KaƟe MarƟn Go ahead. Phillip Inman, Guardian You've got a predicƟon of lower growth and higher unemployment in the second year of the forecast. Do you can you explain to people why that's a price worth paying? And also, Dave, could you give us an explanaƟon of you've obviously voted, at an earlier stage for a cut in rates. Is there a cost to not having moved earlier? Andrew Bailey Well, let me start on Phillip on the growth and unemployment point. And what I would say is this that the path of unemployment that we now have in this, in this report is a lot shallower than two things. One is paths we had in the past. Two is history. And one of the you know, one thing I think quite notable thing that doesn't get said much is just how liƩle unemployment has moved actually in the last few years, and that's a good thing. It's a very good thing. Now there's a liƩle bit of uncertainty, as we know about exactly what the rate of unemployment is at the moment in this country with the problems with the Labour Force survey. But, you know, we use a lot of other indicators to track what we think it is And it's somewhere in the lowish 4% range. If you look back in history, I mean, I I'm not I'm not going to comment on how old you are. I'm old enough to remember when it, you know, it was the headline in every newspaper and every news program, if you go back to the 70s and 80s, I mean, this is a very different cycle. So I don't want to see unemployment go up at any Ɵme. But this is I mean, it's a much shallower path. Why have we got that? Well, it really goes back to the sort of the three points, the three, the three parts to the framework I made. I said earlier, one is this sort of in a sense, self-correcƟng path. The other is where restricƟon does have some impact via an output gap, which does cause some, you know, put some added weight onto the sort of onto the restricƟveness of monetary policy to get this persistent inflaƟon point out. But it's a lot it's a lot milder than we've seen historically to be, to be honest with you. Dave Ramsden And all I’d as is, the degree of restricƟveness that we've sƟll got, I think everyone on the commiƩee sees that as necessary to squeeze the persistent part of inflaƟon to ensure that inflaƟon stays sustainably at target. As I've said before, I said it in May when I did vote for a cut.

Today is really about the collecƟve posiƟon, so I'm not going to get into discussing those kinds of issues today. But there'll be there'll be there'll be opportuniƟes in the future to hear from individual members. Thanks. KaƟe MarƟn We'll go to Joel and then Phil. Joel Hills, ITV The MPC has been quite pessimisƟc on the potenƟal growth rate of the economy relaƟve to the OBR relaƟve to the IMF, and looking through the forecasts today, that seems to sƟll be the case. Happily, we have a new government with a the outline of a plan to kick start growth. Are there things that the government can announce in the next few months that would cause the Bank to be less pessimisƟc on the economy's medium term prospects. And what view would the Bank take of a Trump presidency? What impact would that likely have on the outlook for growth and inflaƟon, please? Andrew Bailey Well, I'll take those in reverse order. I and I'm sure Clare may want to come in on the first. I won't burden Clare with the second. We take no view on the potenƟal of who will win the US presidenƟal elecƟon. We will obviously be interested in the outcome, but we do not take a view on who's going to be the next president of the USA. Sorry. Well, we'll see who wins and what their what their policies are. And yeah, we always we always condiƟon our view on announced UK policies, let alone everybody else's policies. So we'll leave that there. I mean on the quesƟon of growth, as I'm sure Claire want to come in. First of all, we always condiƟon on announced government policies. The government is obviously very new, and it will formulate its views on what it wants the growth policies to be, and we will factor those into our thinking about the supply capacity of the economy. I also want I mean, I do agree very strongly both, by the way, both with the current chancellor and the previous chancellor, because actually there's very liƩle difference here that there are important things that need to be done. Important things that need to be done, parƟcularly in the financial sector, to encourage investment in the producƟve capacity of the economy. I'm a very strong supporter of that. I was very strongly supporƟng Jeremy Hunt in that. And I will take the same view with Rachel Reeves, at which point I'll hand over to Clare. Clare Lombardelli Thanks, Andrew. I mean, yeah, it's you know, we're not we're not going to write the budget here and nor should we. I mean, clearly, you're right We've got growth, sort of underlying growth in our forecast at around 0.3% a quarter.

So, you know, is it isn't, you know, at the moment we think, that that is obviously slightly lower than what we've seen in recent quarters. We think most of that was volaƟlity rather than momentum. But in the medium term, we think if you look at what's in the data, including things like the business surveys, that's more consistent with where we're likely to go. I mean, obviously there's a set of things that could be done that can raise potenƟal growth. Those are clearly things that would help with any, any sense around sort of inflaƟon and, and, and output and that trade off there. But, we think what we've got in our forecast broadly in line with what the data is telling you and the underlying drivers of growth. Dave Ramsden But just to underpin what Clare was just saying and also what Andrew was just saying, the reason that it will be a focus of this government as the previous government is, you know, as we set out, each Ɵme in table 1D, labor producƟvity one was 1.75% on average 1998 to 2007. And then it was 0.75% 2010 to 2019. So we've had that significant shorƞall in producƟvity growth compared to history and we've taken an assessment, of where it's going to go in future that hasn't changed since our last supply stock take. Overall, we had supply growth at 1.5% a year. We keep reassessing that depending on what happens, in the economy, one thing that we focused on this Ɵme and it's, it's more in Andrew's third case the case where there have been more structural challenges is that maybe the he NAIRU, the medium term equilibrium unemployment rate, could be a liƩle bit higher than we've currently esƟmated, that in and of itself would actually be negaƟve for supply growth. But as Andrew and Claire were implying, there are lots of things that could be posiƟve for supply growth, but we're going to have to look at these things in the round. And can do that with each Ɵme we come back and present a forecast in our supply stock takes. Phil Aldrick Bloomberg Just looking at the inflaƟon forecasts, they come down to below 2% at the two year and the three year horizon, which suggests that policy is too Ɵght. So it implies that you either cut faster or further. I just wondered which is more likely. And it's great to see growth being upgraded in the short term. But the Prime Minister has said that he would like to see a 2.5% ambiƟon, and I can't see any of that in the forecast. I just wondered how probable what the probability of a 2.5% might be. Andrew Bailey Well, you quoted the modal inflaƟon forecast. We also have a mean path for inflaƟon, which, as I said in my introductory remarks, starts to bring in this alternaƟve scenario, to use Ben Bernanke's phraseology. The mean path is actually much nearer, much nearer to target. So, it goes back to this point about I made about what weight you place on those paths in thinking about the, the stance of monetary policy going forward. So, I think that's the way to look at that one. On, longer term growth I think we'll just come back to the point we were making earlier. Look, we always condiƟon on announced government policies. At the moment, I would say, and this is essenƟally I mean, Dave's just given you the figures, actually. The potenƟal growth rate is probably

below the sort of historic trend of potenƟal growth rates. The historic trend of potenƟal growth rates is more in the 2 to 2.5% range. It's below that, has been for a while. We will obviously very keenly follow what policies the government decides to adopt and then put those through the process we use in assessing the supply side of the economy and the stock takes we do on that and see where we come out. But it's too soon to do that. Jack BarneƩ, The Times Governor, you've outlined two scenarios where interest rates could be a bit higher and obviously you've outlined all the risks around that as well. I just wondering whether or not you think it's reasonable for people watching this press conference and reading the report to think that we're going back to a world where interest rates are going to be much lower, i.e., are we going back to the world before the pandemic where we had rates near the zero bound? Andrew Bailey Well, let me start by saying we're very clearly not going to sort of give you a sort of a quanƟfied path of where interest rates are going to go that will emerge. So I'll just make one point here, because I think it's important because I get asked this quesƟon a lot, It's a reasonable quesƟon. Where are we going to? I think it's reasonable to say that it's unlikely that we are going back to the world we were in between 2009, actually post the financial crisis and the point at which we started raising rates. And the reason for that is that that world was really driven by very big shocks, if you think about it. So obviously, the first driving shock was the global financial crisis. And then a number of others came along, most recently Obviously, Covid would be the one to point to there. You know, and I say that not because I think if you, you know, what would take us back to that world? Well, I would deduce from history that what would have to take us back to that world is some very big shock that we don't know about at the moment. So, it's much more likely, it seems to me, that we're going back to a world - and it's going back to Ed's quesƟon actually- where we will be somewhere around whatever the neutral rate turns out to be, which let me say, it's reasonable to say is lower than we are at the moment because we're describing policy as restricƟve, but it's higher than we were between 2009 and when we started raising rates, for the point I just made about external shocks. Joasia Popowicz, Central Banking So Joasia Popowicz Central Banking. in the report, it says events in the Middle East have had relaƟvely liƩle impact on inflaƟon to date and that there is a risk of intensificaƟon over a longer period, given the events we've seen only just this weekend, does this assessment already need to be revised. Andrew Bailey So it's a good quesƟon.

Events in the Middle East are tragic and it's terribly sad to watch it. It has had far fewer economic consequences than to two sort of points of comparison. One is history. So if you go back to the 1970s, for instance, and secondly, therefore actually then I think many of us feared when these events started last October, and we can sort of speculate on why that is. But, I mean, the easiest one to look at is the oil price. I mean, we've not had a big spike up in the oil price, which, you know, say drawing on the lessons of history, it would have been perfectly reasonable to expect might have happened if you took a rather simplisƟc approach to the lessons of history. So that's encouraging. But I have, you know, there's always a but I think we have to be very vigilant on this front. I think we decided that the risk, the skew that we had in the forecast, you know, up Ɵll now since those events started, we wouldn't retain because of the fact that we haven't seen the signs of it emerging. But I don't for a moment want to give you the impression that means we're not very vigilant about this because, as you rightly said, things can change very quickly. Chris Giles, Financial Times You say in the report that you don't want to go to cut rates too much or too quickly. Can you define too much and too quickly, or is it just vibes? Andrew Bailey Well, I'm not going to define it. I'm going to come back to the framework that we set out. I think we're going to have to, at each meeƟng, come back to this and say, and it's why I made the point that in a sense we've raised this assessment framework up a level from, from the evidence itself, but we're then going to ask ourselves the quesƟon, what does the evidence that we've had since we last sort of considered it tell us about the framework. And what does it tell us about these sort of three parts of the framework? Are we seeing, you know, more evidence that, you know, this persistent inflaƟon evidence, the fact that the second-round effects, are taking longer to dissipate, than, than inflaƟon did to emerge. No great surprise about that based on history. But what are we learning about this? And that's what we'll do. So I'm not going to say, what is it? I'm not going to tell you what it means because we don't know at this stage. I think what it means is there are a number of potenƟal paths here. Each member of the commiƩee will give somewhat different weights to those three parts to the framework and that's absolutely fair and understandable. You know, reasonable people can do that, and I would also, be sure that each of us will, in a sense, recalibrate those as we see the evidence, and that's how we will do it. Andy Bruce Reuters. I've got a quesƟon about QuanƟtaƟve Tightening. In the MPR It's menƟoned that it's, there's a degree of uncertainty about how QT will interact with rate cuts because it's never been tried before.

And then it goes on to say if QT has a bigger impact than expected, then the level of Bank Rate allows some scope for it to be cut to counteract that if necessary. My quesƟon is why wouldn't you just pause QT or reduce it in that situaƟon and use Bank Rate, which is quite a rough tool. Andrew Bailey Well, I'm sure Dave will want to come in, but I feel so terrible about this, but I'm going to refer to another of my speeches. If you read the speech I gave at LSE a couple of months ago, the reason I say that I in that speech I set out what I regard as an important part point. There are two parts to the path, really. Because, by the way, we're moving to a system where the level of reserves, bank, central bank reserves will be demand driven. It's a bit different from the fed there where they they've more set a supply set sense framework that they want to have ample reserves. Now we can't tell you what that what the precise point where we hit that sort of demand number is we're not we're not there yet. We know that. But the reason I say that is that the first part of QT is to do with reducing the level of reserves to the sort of the equilibrium level, if you like. We think we may get there later next year, but we don't know for certain. The second, the second part comes thereaŌer . That's not about the level of reserves. It's actually about a different issue, which is what is the right set of assets for the Bank of England to have on its balance sheet to match the level, the equilibrium level of reserves? And that's really about what where do we want the interest rate risk to be in that world. Should the central bank be bearing it, or should the market out there be bearing it? And you'll take a preƩy big clue from what I said at the LSE, that I'm more in favour of the laƩer than the former. Dave, what do you want to. Dave Ramsden Yeah, just to, I guess, try and locate, the kind of immediate decision that we have to make. Andrews talked more about the longer-term consideraƟons and where we could be going, but we will make our, decision for the next QT year, in September. And that will be based - and this is what we set out in box A- where we've done our annual review of how, how QT is operaƟng based on the last year, on three key principles. And we've stressed these ever since we first set things out, actually, three years ago, I think it was August 2021. The first one is that Bank Rate’s going to be the acƟve tool. And we really do want QT to be in the background. We're not going to do QT if it risks disrupƟng the funcƟoning of financial markets. And linked to that, we also want to take a gradual and predictable approach. So, what we have put in for this year's box is the point you were quoƟng around what happens now. It turns out that this meeƟng we have we have reduced Bank Rate. Where does that leave QT? Well, those principles sƟll absolutely apply. And also, we've always been very clear that QT does have a small impact. We esƟmate it. If you look at we've done just over or we will have done by the Ɵme we complete this, this year's, Q2 will have done, Just over 200 billion, we’ll have reduced the APF from 895 billion, down by over 200 billion. That was the peak. And we think that, our central esƟmate has had about a 0.1% impact on long term interest rates. It could be as much as 0.2, but those are preƩy small numbers, e

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