Monetary Policy Report - November 2024
Between 2021 and 2023 we raised to slow down price rises (). It’s working. Inflation fell back to the 2% target in May of this year from a peak of just over 11% in 2022. Since then inflation has stayed close to the target.
Easing inflationary pressures meant we were able to cut interest rates to 5% in August.
We are cutting interest rates again today, to 4.75%.
We expect inflation to rise slightly again over the next year, to around 2¾%. Inflation is expected to fall back to the 2% target after that.
If inflation remains low and stable it’s likely that we will reduce interest rates further. But we have to be careful not to cut interest rates too quickly or too much. High inflation has affected everyone, but it particularly hurts those who can least afford it.
Think of a shopping basket filled with items that nearly everyone buys. Inflation is the rate of increase in the prices of items in that basket. We normally measure inflation as the change in prices over one year. So a 2% inflation rate means that a basket of shopping that cost £100 pounds last year now costs £102.
The interest rate is usually shown as a percentage of the amount you borrow or save. This is paid as interest over the course of a year. So if you put £100 into a savings account that offers a 1% interest rate, then you’d have £101 a year later. If the interest rate was 2%, you’d get £102, and so on.
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Inflation is close to the 2% target and we’ve been able to cut interest rates again.
Our job is to make sure that inflation stays at our target.
Inflation has fallen sharply since 2022. Energy prices are around 25% lower than their recent peaks, and food price inflation has slowed from just below 20% 18 months ago to less than 2% in September.
Higher interest rates have helped slow down price rises, such that inflation has been close to the 2% target since May.
Higher interest rates work by reducing demand for goods and services in the economy. This helps slow the rate of inflation.
Inflation has stayed close to the 2% target in recent months
We need to ensure inflation stays low. So we will not cut rates too quickly or too much.
The progress we have made on inflation meant we were able to cut interest rates to 5% in August. And we have cut rates again today, to 4.75%.
Nevertheless, inflation is likely to rise to around 2¾% over the next year, as household energy prices provide less of a drag on inflation than they have done in recent months.
Inflation is expected to fall back to the 2% target after that.
We can’t rule out more global shocks that keep inflation high though. For example, developments in the Middle East could increase inflation by causing oil prices to rise.
We have cut interest rates to 4.75%
If things evolve as expected, it’s likely that interest rates will continue to fall gradually.
The best contribution the Bank can make to support economic growth and people’s prosperity is to make sure we have low and stable inflation.
If inflation remains close to the target, we expect to reduce interest rates further.
But there is a risk that inflation could be higher than expected. Despite overall inflation being at target, prices of some services are still rising too quickly.
We need to be careful not to cut rates too much or too quickly, so that inflation remains low and stable for years to come.
We expect inflation to rise back above the 2% target over the next year and then to fall back to the 2% target after that.
Monetary Policy Report
Monetary Policy Summary
The Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. The MPC adopts a medium-term and forward-looking approach to determine the monetary stance required to achieve the inflation target sustainably.
At its meeting ending on 6 November 2024, the MPC voted by a majority of 8–1 to reduce Bank Rate by 0.25 percentage points, to 4.75%. One member preferred to maintain Bank Rate at 5%.
There has been continued progress in disinflation, particularly as previous external shocks have abated, although remaining domestic inflationary pressures are resolving more slowly.
CPI inflation fell to 1.7% in September but is expected to increase to around 2½% by the end of the year as weakness in energy prices falls out of the annual comparison. Services consumer price inflation has declined to 4.9%. Annual private sector regular average weekly earnings growth has continued to fall but remained elevated at 4.8% in the three months to August. Headline GDP growth is expected to fall back to its recent underlying pace of around ¼% per quarter over the second half of this year. The MPC judges that the labour market continues to loosen, although it appears relatively tight by historical standards.
Monetary policy has been guided by the need to squeeze remaining inflationary pressures out of the economy to achieve the 2% target both in a timely manner and on a lasting basis. The Committee’s deliberations have been supported by the consideration of a range of cases that could impact the evolution of inflation persistence. These three cases are set out further in the accompanying November Monetary Policy Report.
In the first case, most of the remaining persistence in inflation may dissipate quickly as pay and price-setting dynamics continue to normalise following the unwinding of the global shocks that drove up inflation. In the second case, a period of economic slack may be required to normalise these dynamics fully. In the third case, some inflationary persistence may also reflect structural shifts in wage and price-setting behaviour. Each case would have different implications for how quickly the restrictiveness of monetary policy could be withdrawn.
The MPC’s latest projections for activity and inflation are also set out in the accompanying November Report. This forecast is based on the second case. CPI inflation is projected to fall back to around the 2% target in the medium term, conditioned on the usual 15 day average of forward interest rates, as a margin of slack emerges later in the forecast period that acts against second-round effects in domestic prices and wages.
The combined effects of the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP by around ¾% at their peak in a year’s time, relative to the August projections. The Budget is provisionally expected to boost CPI inflation by just under ½ of a percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures.
There remains significant uncertainty around the outlook for the labour market. Data are difficult to interpret and wage growth has been more elevated than usual relationships would predict. The impact of the Budget announcements on inflation will depend on the degree to and speed with which these higher costs pass through into prices, profit margins, wages and employment.
At this meeting, the Committee voted to reduce Bank Rate to 4.75%, reflecting the continued progress in disinflation.
Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further. The Committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting.
1: The economic outlook
Twelve-month CPI inflation was at the MPC’s 2% target in 2024 Q3. Headline GDP growth is expected to fall back to its recent underlying pace of around ¼% per quarter in the second half of this year.
As set out in Box B, the combined effects of the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP by around ¾% at their peak in a year’s time, relative to the August Monetary Policy Report projections. The Budget is provisionally expected to boost CPI inflation by just under ½ of a percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures.
In the forecast described in Section 1.2, four-quarter GDP growth is expected to pick up to almost 1¾% in the first part of the forecast period, before falling back slightly (Key judgement 1). Aggregate demand and supply are judged to be broadly in balance currently and to remain so over the coming year. A margin of economic slack is projected to emerge during 2026 in part reflecting the overall tightening in the stance of fiscal policy assumed in the Budget, and also the continued restrictive stance of monetary policy (Key judgement 2). Unemployment is expected to rise slightly in the second half of the forecast period. There remains significant uncertainty around the labour market outlook.
CPI inflation is expected to increase to around 2¾% by the second half of 2025 as weakness in energy prices falls out of the annual comparison, revealing more clearly the continuing persistence of domestic inflationary pressures. In the projection, second-round effects in domestic prices and wages are expected to take somewhat longer to unwind than they did to emerge (Key judgement 3). The margin of slack that emerges later in the forecast period is sufficient to act against those second-round effects, leading CPI inflation to fall back to around the 2% target in the medium term, conditioned on the usual 15 day average of forward interest rates. This forecast also incorporates a higher projection for import price inflation. Private sector regular AWE growth is expected to fall further and to reach around 3% by the start of 2026, remaining close to that level thereafter.
The Committee’s deliberations have been supported by the consideration of a range of cases for the state of the economy. The MPC has considered alternative cases for how the persistence of inflationary pressures may evolve (Box A). In these cases, inflationary pressures may prove to be either less persistent or more persistent than in the forecast, which is based on the second case outlined in the September MPC minutes in which a period of economic slack is required in order for pay and price-setting dynamics to normalise fully.
Table 1.A: Forecast summary (a) (b)
2024 Q4 | 2025 Q4 | 2026 Q4 | 2027 Q4 | |
---|---|---|---|---|
GDP (c) | 1.7 (2) | 1.7 (0.9) | 1.1 (1.5) | 1.4 |
CPI inflation (d) | 2.4 (2.7) | 2.7 (2.2) | 2.2 (1.6) | 1.8 |
Unemployment rate (e) | 4.2 (4.4) | 4.1 (4.7) | 4.3 (4.7) | 4.4 |
Excess supply/Excess demand (f) | 0 (-¼) | -¼ (-1¼) | -½ (-1) | -¼ |
Bank Rate (g) | 4.8 (4.9) | 3.7 (4.1) | 3.7 (3.7) | 3.6 |
Footnotes
- (a) Figures in parentheses show the corresponding projections in the August 2024 Monetary Policy Report.
- (b) The numbers shown in this table are conditioned on the assumptions described in Section 1.1.
- (c) Four-quarter growth in real GDP.
- (d) Four-quarter inflation rate.
- (e) ILO definition of unemployment. Although LFS unemployment data have 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 (see Box D in the May 2024 Monetary Policy Report).
- (f) Per cent of potential GDP. A negative figure implies output is below potential and a positive that it is above.
- (g) Per cent. The path for Bank Rate implied by forward market interest rates. The curves are based on overnight index swap rates.
Chart 1.1: CPI inflation and CPI inflation excluding energy (a)
1.1: The conditioning assumptions underlying the MPC’s projections
As set out in Table 1.B, the MPC’s November projections are conditioned on:
- The paths for policy rates in advanced economies implied by financial markets, as captured in the usual 15 working day averages of forward interest rates to 29 October (Chart 2.6). The market-implied path for Bank Rate underpinning the November projections declines relatively rapidly in the near term and to around 3½% by the end of the three-year forecast period, similar to the endpoint in the August Report.
- A path for the sterling effective exchange rate index that is around ½% higher compared with the August Report. The exchange rate depreciates slightly over the forecast period, reflecting the role of expected interest rate differentials in the Committee’s conditioning assumption.
- Wholesale energy prices that follow their respective futures curves over the forecast period. Since August, oil prices have fallen, while gas futures prices have increased slightly (Chart 2.4). Significant uncertainty remains around the outlook for wholesale energy prices, including related to geopolitical developments.
- UK household energy prices that move in line with Bank staff estimates of the Ofgem price cap implied by the paths of wholesale gas and electricity prices (Section 2.5).
- Fiscal policy that evolves in line with UK government policies to date, as announced in Autumn Budget 2024 on 30 October (see Box B).
Table 1.B: Conditioning assumptions (a) (b)
Average 1998–2007 | Average 2010–19 | 2023 | 2024 | 2025 | 2026 | 2027 | |
---|---|---|---|---|---|---|---|
Bank Rate (c) | 5.0 | 0.5 | 5.3 (5.3) | 4.8 (4.9) | 3.7 (4.1) | 3.7 (3.7) | 3.6 |
Sterling effective exchange rate (d) | 100 | 82 | 81 (81) | 85 (84) | 84 (84) | 84 (83) | 83 |
Oil prices (e) | 39 | 77 | 84 (84) | 75 (83) | 73 (78) | 71 (75) | 71 |
Gas prices (f) | 29 | 52 | 101 (101) | 101 (92) | 101 (95) | 87 (84) | 78 |
Nominal government expenditure (g) | 7¼ | 2¼ | 7 (7) | 6 (2¾) | 6¾ (2¼) | 3½ (2¾) | 3¼ |
Footnotes
- Sources: Bank of England, Bloomberg Finance L.P., LSEG Workspace, Office for Budget Responsibility (OBR), ONS and Bank calculations.
- (a) The table shows the projections for financial market prices, wholesale energy prices and government spending projections that are used as conditioning assumptions for the MPC’s projections for CPI inflation, GDP growth and the unemployment rate. Figures in parentheses show the corresponding projections in the August 2024 Monetary Policy Report.
- (b) Financial market data are based on averages in the 15 working days to 29 October 2024. Figures show the average level in Q4 of each year, unless otherwise stated.
- (c) Per cent. The path for Bank Rate implied by forward market interest rates. The curves are based on overnight index swap rates.
- (d) Index. January 2005 = 100. The convention is that the sterling exchange rate follows a path that is halfway between the starting level of the sterling ERI and a path implied by interest rate differentials.
- (e) Dollars per barrel. Projection based on monthly Brent futures prices.
- (f) Pence per therm. Projection based on monthly natural gas futures prices.
- (g) Annual average growth rate. Nominal general government consumption and investment. Projections are based on the OBR’s October 2024 Economic and Fiscal Outlook. Historical data based on NMRP+D7QK.
1.2: Key judgements and risks
1.2: Key judgement 1
Four-quarter GDP growth is expected to pick up to almost 1¾% in the first part of the forecast period, before falling back slightly.
UK GDP grew by 0.5% in 2024 Q2, slightly below expectations in the August Report. Bank staff estimate that underlying momentum in demand has been slightly weaker than this, at around ¼% per quarter. GDP growth is projected to have slowed in the second half of 2024 to around that underlying rate, consistent with the steer from a range of business surveys (Section 2.3).
UK-weighted world GDP grew by 0.5% in 2024 Q2 and is projected to have grown at a similar pace in Q3 (Section 2.1). In the November Report, the paths of global GDP and trade are broadly unchanged from the August projections. Despite some strength in Q3 and a lower market-implied path of interest rates, near-term activity in the euro area is expected to be slightly weaker in these projections than in August. The outlook for the United States has remained supported by strong potential supply growth. Four-quarter UK-weighted world GDP growth is projected to rise to just over 2% in 2025 and beyond, slightly below its average rate in the decade prior to the pandemic (Table 1.D).
There remains some downside risk to global growth if domestic demand in China proves to be softer than expected, despite the recent policy support announced by the Chinese authorities. There may also be some downside risks around growth in the euro area. There is uncertainty around the path of fiscal policy in advanced economies. The continuing risk of higher commodity prices and disruption to trade flows associated with developments in the Middle East could, alongside other significant geopolitical uncertainties, lead to weaker economic activity as well as greater external inflationary pressures (Key judgement 3).
The current stance of monetary policy is restrictive. Bank staff now judge that all of the impact of higher interest rates since the middle of 2021 on the level of UK GDP is likely to have come through. Under the latest market-implied path for interest rates, including its expected impact on broader financial conditions, monetary policy is expected to have a broadly neutral impact on GDP growth over the forecast period. The restrictiveness of policy is still pushing down inflation over the forecast, however. There remain uncertainties around the impact of monetary policy on the economy (as discussed in Box C in the August Report).
The MPC’s November projections are conditioned on fiscal policy that evolves in line with UK government policies, as announced in Autumn Budget 2024. As set out in Box B, the combined effects of the measures announced in the Budget including the additional funding for previous spending pressures are provisionally expected to boost the level of GDP by around ¾% at their peak in a year’s time relative to the August Report projections, as the stronger, and relatively front-loaded, paths for government consumption and investment more than offset the impact on growth of higher taxes. The increase in employer National Insurance contributions (NICs) is also assumed to lead to a small decrease in potential supply over the forecast period (Key judgement 2). The Committee will monitor the impact of the Budget, including ahead of its next forecast round in February.
After taking account of the latest fiscal plans but also the fading impact of past loosening measures, the overall stance of fiscal policy is still expected to tighten over the forecast period. This pulls down somewhat on the GDP growth projection in the medium term.
Overall, in the November projection, four-quarter GDP growth is projected to pick up to almost 1¾% in the first part of the forecast period, before falling back slightly (Chart 1.2). GDP growth in 2025 is somewhat stronger than in the August Report, reflecting the looser near-term stance of fiscal policy and the lower market path of interest rates over the first part of the forecast period. It is slightly weaker towards the end of the period, however, reflecting an unwind of some of the Committee’s previous judgement to boost the expected path of demand relative to its standard determinants. That change in judgement could be consistent with the upward revisions to historical GDP in Blue Book 2024, which may mean that there is less strength to come over the forecast period. It could also be consistent with more forward-looking behaviour by households and businesses such that the boost to GDP from recent fiscal news fades more quickly in the medium term than would usually be assumed.
Household spending growth is expected to follow a similar path to headline GDP growth over the forecast period, stronger in the first part of the forecast than in the August Report and weaker further out. Following downward revisions in the Blue Book, the saving ratio is expected to fall from around 10% of household income to just above 8¼% by the end of the forecast period, slightly above its pre-pandemic average. Much of this fall reflects the impact of the downward-sloping assumed path of interest rates, which would reduce incentives to save and make it cheaper to borrow. Box E discusses the risks in both directions around the saving ratio and household consumption projections. There is also uncertainty around how households will react to the news of higher government spending and taxes in the Budget, and how the state of the economy could interact with the usual pass-through of these measures to consumer spending and saving behaviour.
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 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.
1.2: Key judgement 2
A margin of economic slack is projected to emerge during 2026 in part reflecting the overall tightening in the stance of fiscal policy assumed in the Budget, and also the continued restrictive stance of monetary policy.
Following a period for 2021 to 2023 in which the economy was operating with excess demand, aggregate demand and supply are judged to have been broadly in balance since the end of last year. Following the upward revisions to historical GDP in Blue Book 2024 (Chart 2.13), the degree of excess demand over the past is judged to be marginally greater than assumed at the time of the August Report. That is consistent with a judgement that around half of the news in the Blue Book is likely to have reflected additional excess demand (Section 2.4). All else equal, that also leads to a marginally higher path for the output gap currently and over much of the forecast period, relative to the August projection. The Committee continues to recognise the significant uncertainty around real-time estimates of the output gap. It also notes that recent revisions to the output gap have tended to be in the direction of greater past excess demand or a delay to the point at which excess supply is assumed to emerge.
The MPC is continuing to consider the collective steer from a wide range of indicators to inform its view on labour market developments. As discussed in Box D in the May Report, there remain concerns about the lower achieved sample sizes and therefore the quality of the data derived from the ONS Labour Force Survey, making it more difficult for the Committee to gauge the underlying state of labour market activity.
Based on a broad set of indicators, the MPC judges that the labour market continues to ease but that it appears relatively tight by historical standards. Bank staff estimate that the unemployment rate has been broadly stable recently (Chart 2.18). This has been at a rate close to the latest reading of the much more volatile LFS measure, which fell back to 4.0% in the three months to August. The vacancies to unemployment ratio has fallen moderately since the start of 2024, to around its 2019 level.
The increase in employer NICs in the Budget represents an increase in labour costs, which will initially be fully incident on businesses. But the aggregate impacts on growth and inflationary pressures in the economy will ultimately be determined by the degree to and speed with which the tax increase is transmitted into prices, wages, employment or otherwise absorbed into profit margins or productivity growth. In the MPC’s projections, the NICs change is provisionally assumed to have a small upward impact on companies’ prices and a small downward impact on wages over the forecast period (Key judgement 3). That weakness in wages is also assumed to have a small downward impact on labour supply through reduced labour market participation. The Committee will monitor closely the impact of the increase in employer NICs on the labour market and the wider economy.
Other than this small change to labour supply, the Committee has not adjusted its judgements on potential supply growth over the forecast period in this Report. The Committee will undertake a review of the determinants of the short to medium-term supply capacity of the economy in its next regular stocktake ahead of the February 2025 Report.
In the projection, aggregate demand and supply are judged to remain broadly in balance over the coming year. Demand growth is then expected to be weaker than potential supply growth during 2026, such that a margin of economic slack is projected to emerge. That in part reflects the overall tightening in the stance of fiscal policy that is assumed to occur following the Budget, and also the continued restrictive stance of monetary policy. The margin of aggregate excess supply is expected to reach around ½% of potential GDP in the medium term. Relative to the August Report projection, there is expected to be a smaller margin of excess supply throughout the forecast period and particularly during 2025 and the first half of 2026, in large part reflecting the news in the Budget.
The unemployment rate is projected to rise slightly in the second half of the forecast period, such that it reaches the assumed medium-term equilibrium rate of around 4½% by the end of the forecast period (Chart 1.3).
There remains significant uncertainty around the labour market outlook, and it could remain tighter or looser than projected for a number of reasons, including the risks around the outlook for demand (Key judgement 1). There is a risk that changes in the overall cost of employment for firms, including the increase in employer NICs and the National Living Wage, lead to greater cash-flow constraints for some businesses, particularly SMEs. There could, however, be an upside risk to labour demand if greater certainty in the fiscal outlook provides support to confidence and demand.
There continues to be significant uncertainty around the MPC’s assumption for the path of the equilibrium rate of unemployment, developments in which would, holding demand fixed, have implications for inflationary pressures. The Committee made an upward adjustment to the medium-term equilibrium rate in the November 2023 Report, reflecting a greater degree of real income resistance following the terms of trade shock to the economy. It remains possible that the equilibrium rate of unemployment is even higher, consistent with more persistence in future wage growth (as considered in one of the alternative cases for the state of the economy discussed in Box A).
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 Q3. 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 (see Box D in the May 2024 Monetary Policy Report). 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.
1.2: Key judgement 3
Second-round effects in domestic prices and wages are expected to take somewhat longer to unwind than they did to emerge. The margin of slack that emerges later in the forecast period is sufficient to act against those second-round effects, leading CPI inflation to fall back to around the 2% target in the medium term, conditioned on the usual 15 day average of forward interest rates.
Twelve-month CPI inflation was at the MPC’s 2% target in 2024 Q3, weaker than expected in the August 2024 Report (Section 2.5), and well below the greater than 3% rate expected in the November 2023 Report.
The decline in CPI inflation since the start of this year has primarily reflected lower goods price inflation, alongside a smaller fall in services price inflation. The latter fell quite sharply to 4.9% in September, but most of the recent downside news in services inflation has been accounted for by more volatile components, some of which is expected to partially unwind in coming months. Annual private sector regular AWE growth declined to 4.8% in the three months to August, in line with expectations in the August Report and somewhat lower than the comparable forecast at the time of the November 2023 Report. Many indicators of household and business inflation expectations have normalised to around their 2010 to 2019 averages, although some household measures have risen recently.
CPI inflation is projected to increase over the next year, to around 2¾% by the second half of 2025. This profile of headline inflation is more than accounted for by developments in the direct energy price contribution to 12-month CPI inflation, which is expected to become less negative in the middle of next year and to turn slightly positive by the second half of 2025 (Chart 1.1). This is a slightly lower near-term profile for energy prices than at the time of the August Report. Relative to the assumptions in the August Report, the decision in the Budget to extend the freeze and temporary 5p cut to fuel duty rates in 2025–26 pushes down directly on inflation over the next fiscal year, offset partly by an increase in Vehicle Excise Duty, but pushes up on the 12-month inflation rate over the four quarters from 2026 Q2 as the 5p cut is assumed to expire and fuel duty is assumed to rise in line with RPI inflation thereafter.
CPI inflation excluding energy is projected to fall from 3¼% currently to around 3% in the first half of next year and to 2¾% in the second half of next year (Chart 1.1), revealing more clearly the continuing, even if gradually waning, persistence of inflationary pressures.
Four-quarter UK-weighted world export price inflation, excluding the direct effects of oil prices, was negative at the turn of this year, but has since picked up and is projected to remain slightly positive over most of the forecast period. There are risks in both directions around this projection (Section 2.1). Although there has so far continued to be a relatively limited impact on oil prices from events in the Middle East, there remains a risk of further intensification and wider economic spillovers including via greater uncertainty in financial markets. The possibility of greater trade fragmentation and increased trade restrictions could also push up on world export prices. Continued weakness in China could, however, pose a downside risk to both oil and world export prices, particularly if it were to be associated with a broader slowdown in global demand.
Alongside the sterling exchange rate, the path of world export prices is the main determinant of developments in UK import prices, which in turn pass through over time to the external pressures on CPI inflation. As discussed in Box D, the Committee has made a number of judgements over recent years on the pass-through of sterling world export prices to UK import and consumer prices. In this Report, the MPC now judges that less of the unexpected strength in import prices observed in the past will unwind, pushing up on import price inflation over the forecast period, and more than offsetting some downside news on world export prices and the impact of sterling’s appreciation since the August Report. Import prices are projected to be flat in 2025 and to increase by ¾% in 2026, both somewhat stronger than the falls in import prices expected over that period in the August projection (Table 1.D).
In the November projection for CPI inflation, the Committee has maintained its broad judgement that second-round effects in wages and domestic prices will take somewhat longer to unwind than they did to emerge. As a margin of slack in the economy emerges during 2026 in the forecast (Key judgement 2), the degree of excess inflationary persistence embedded in the CPI projection starts to fade from this point onwards. In this sense, the Committee’s projection is based on the second case set out in the September MPC minutes, in which a period of economic slack may be required in order for pay and price-setting dynamics to normalise fully. In order to set monetary policy in this case, the MPC needs to consider the trade-off, that emerges to some degree in the forecast, between the speed with which inflation should be brought back down to the 2% target and the costs in terms of employment and output which doing that involves.
There remains considerable uncertainty around the calibration of the Committee’s judgement on the current degree and future path of second-round effects in wages and domestic prices. This includes the extent to which persistent pressures prove more enduring than in the forecast, or unwind more quickly, and the role that monetary policy may need to play in ensuring that inflation returns to target in the medium term. These alternative cases for the underlying behaviour of the economy and inflationary persistence are outlined in detail in Box A. The Committee also continues to monitor the accumulation of evidence from a broad range of indicators, with a focus on the extent to which it is possible over time to use developments in data series to assess the various cases that it is considering.
In the projection conditioned on the market-implied path of interest rates in the 15 working days to 29 October, CPI inflation increases from the 2% target in 2024 Q3 to around 2¾% by the second half of 2025. Reflecting the continued restrictive stance of monetary policy and the emergence of a margin of slack in the economy, CPI inflation then falls back to around the 2% target in the medium term (Chart 1.4 and Table 1.C). The November CPI projection is somewhat higher than in August beyond the first few quarters of the forecast period. This reflects the smaller margin of excess supply (Key judgement 2), the news in the Autumn Budget on fuel duty that boosts inflation over the 12 months from 2026 Q2, and the impact of the higher projection for import price inflation.
Private sector regular AWE growth is expected to fall further and to reach around 3% by the start of 2026, remaining close to that level thereafter. This is slightly higher throughout the forecast period than in the August Report, reflecting the smaller margin of excess supply in the economy, offset slightly by an assumption in this forecast that a small part of the increase in employer NICs will be passed through into lower wages (Key judgement 2).
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 Q4. It has been conditioned on Bank Rate following a path implied by market yields, but allows the Committee’s judgement on the risks around the other conditioning assumptions set out in Section 1.1, including wholesale energy prices, to affect the calibration of the fan chart skew. If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s 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.
Table 1.C: The quarterly projection for CPI inflation based on market rate expectations (a)
2024 Q4 | 2025 Q1 | 2025 Q2 | 2025 Q3 | 2025 Q4 | |
---|---|---|---|---|---|
CPI inflation | 2.4 | 2.4 | 2.6 | 2.8 | 2.7 |
2026 Q1 | 2026 Q2 | 2026 Q3 | 2026 Q4 | ||
CPI inflation | 2.6 | 2.4 | 2.3 | 2.2 | |
2027 Q1 | 2027 Q2 | 2027 Q3 | 2027 Q4 | ||
CPI inflation | 2.1 | 1.9 | 1.9 | 1.8 |
Table 1.D: Indicative projections consistent with the MPC's forecast (a) (b)
Average 1998–2007 | Average 2010–19 | 2023 | 2024 | 2025 | 2026 | 2027 | ||
---|---|---|---|---|---|---|---|---|
World GDP (UK-weighted) (c) | 3 | 2½ | 2 (1¾) | 2 (2) | 2 (2¼) | 2¼ (2¼) | 2¼ | |
World GDP (PPP-weighted) (d) | 4 | 3¾ | 3¼ (3¼) | 3 (3) | 3 (3) | 3¼ (3) | 3 | |
Euro-area GDP (e) | 2½ | 1½ | ½ (½) | ¾ (¾) | 1¼ (1½) | 1¾ (1½) | 1¾ | |
US GDP (f) | 3 | 2½ | 3 (2½) | 2¾ (2½) | 2 (2) | 2 (2) | 2 | |
Emerging market GDP (PPP-weighted) (g) | 5½ | 5 | 4½ (4¼) | 4 (4¼) | 4 (4) | 4 (4) | 4 | |
of which, China GDP (h) | 10 | 7½ | 5¼ (5½) | 4¾ (4¾) | 4½ (4¼) | 4 (4) | 4 | |
UK GDP (i) | 2¾ | 2 | ¼ (0) | 1 (1¼) | 1½ (1) | 1¼ (1¼) | 1¼ | |
Household consumption (j) | 3¼ | 2 | ¾ (¼) | ¾ (½) | 1¾ (1½) | 2 (1¾) | 1½ | |
Business investment (k) | 3 | 4¼ | 2¾ (5½) | 1½ (1) | 3¼ (2¼) | 2¾ (2) | 2¼ | |
Housing investment (l) | 3¼ | 4 | -7 (-7½) | -½ (¾) | 3½ (2¾) | 2½ (1½) | 1½ | |
Exports (m) | 4½ | 3½ | -2¼ (-½) | -¾ (-3¼) | 2¼ (1¾) | 1¾ (2¾) | 2 | |
Imports (n) | 6 | 4 | -3½ (-1½) | 2½ (-1½) | 4¼ (4¼) | 3¾ (3¼) | 2¾ | |
Contribution of net trade to GDP (o) | -¼ | -¼ | ½ (¼) | -1 (-½) | -¾ (-¾) | -¾ (-¼) | -¼ | |
Real post-tax labour income (p) | 3¼ | 1½ | 1½ (¾) | 4¼ (3½) | 1½ (1½) | ¼ (½) | ¾ | |
Household saving ratio (q) | 7¼ | 7¾ | 7¼ (9¾) | 10 (11¾) | 10¼ (11¼) | 9 (10½) | 8½ | |
Credit spreads (r) | ¾ | 2½ | ¾ (¾) | 1 (1) | 1¼ (1¼) | 1½ (1½) | 1½ | |
Excess supply/Excess demand (s) | 0 | -1¾ | ¾ (½) | 0 (-¼) | 0 (-¾) | -¼ (-1¼) | -½ | |
Labour productivity (output per worker) (t) | 1¾ | ¾ | -¼ (-½) | ¾ (1½) | ½ (¼) | ¾ (¾) | ½ | |
Employment (u) | 1 | 1¼ | ¼ (¼) | ¾ (0) | ½ (¾) | ½ (¾) | ¾ | |
Working-age (16+) population (v) | ¾ | ¾ | ¾ (¾) | ¾ (¾) | 1 (1) | 1 (1) | ¾ | |
LFS unemployment rate (w) | 5¼ | 6 | 3¾ (3¾) | 4¼ (4½) | 4¼ (4¾) | 4¼ (4¾) | 4½ | |
Participation rate (x) | 63 | 63½ | 62¾ (62¾) | 63 (62¾) | 62¾ (62½) | 62½ (62½) | 62½ | |
CPI inflation (y) | 1½ | 2¼ | 4¼ (4¼) | 2¼ (2¾) | 2¾ (2¼) | 2¼ (1½) | 1¾ | |
UK import prices (z) | -¼ | 1¼ | 1¼ (½) | -1¼ (-¾) | 0 (-1) | ¾ (-¼) | ½ | |
Energy prices – direct contribution to CPI inflation (aa) | ¼ | ¼ | -1¼ (-1¼) | -½ (-¼) | 0 (0) | 0 (-¼) | 0 | |
Private sector regular average weekly earnings (AWE) (ab) | 4 | 2¼ | 6¼ (6¼) | 5 (5) | 3¼ (3) | 3¼ (2¾) | 3 | |
Private sector regular pay-based unit wage costs (ac) | 2 | 1¾ | 6¾ (7) | 4 (2) | 2¼ (3) | 2¾ (1¾) | 2 |
Footnotes
- Sources: Bank of England, Bloomberg Finance L.P., Department for Energy Security and Net Zero, Eurostat, IMF World Economic Outlook (WEO), National Bureau of Statistics of China, ONS, US Bureau of Economic Analysis and Bank calculations.
- (a) The profiles in this table should be viewed as broadly consistent with the MPC’s projections for GDP growth, CPI inflation and unemployment (as presented in the fan charts).
- (b) Figures show annual average growth rates unless otherwise stated. Figures in parentheses show the corresponding projections in the August 2024 Monetary Policy Report. Calculations for back data based on ONS data are shown using ONS series identifiers.
- (c) Chained-volume measure. Constructed using real GDP growth rates of 188 countries weighted according to their shares in UK exports.
- (d) Chained-volume measure. Constructed using real GDP growth rates of 189 countries weighted according to their shares in world GDP using the IMF’s purchasing power parity (PPP) weights.
- (e) Chained-volume measure. The forecast was finalised before the release of the preliminary flash estimate of euro-area GDP for Q3, so that has not been incorporated.
- (f) Chained-volume measure. The forecast was finalised before the release of the advance estimate of US GDP for Q3, so that has not been incorporated.
- (g) Chained-volume measure. Constructed using real GDP growth rates of 155 emerging market economies, weighted according to their relative shares in world GDP using the IMF’s PPP weights.
- (h) Chained-volume measure.
- (i) Chained-volume measure.
- (j) Chained-volume measure. Includes non-profit institutions serving households. Based on ABJR+HAYO.
- (k) Chained-volume measure. Based on GAN8.
- (l) Chained-volume measure. Whole-economy measure. Includes new dwellings, improvements and spending on services associated with the sale and purchase of property. Based on DFEG+L635+L637.
- (m) Chained-volume measure. The historical data exclude the impact of missing trader intra‑community (MTIC) fraud. Since 1998 based on IKBK-OFNN/(BOKH/BQKO). Prior to 1998 based on IKBK.
- (n) Chained-volume measure. The historical data exclude the impact of MTIC fraud. Since 1998 based on IKBL-OFNN/(BOKH/BQKO). Prior to 1998 based on IKBL.
- (o) Chained-volume measure. Exports less imports.
- (p) Wages and salaries plus mixed income and general government benefits less income taxes and employees’ National Insurance contributions, deflated by the consumer expenditure deflator. Based on [ROYJ+ROYH-(RPHS+AIIV-CUCT)+GZVX]/[(ABJQ+HAYE)/(ABJR+HAYO)]. The backdata for this series are available at Monetary Policy Report – Download chart slides and data – November 2024.
- (q) Annual average. Percentage of total available household resources. Based on NRJS.
- (r) Level in Q4. Percentage point spread over reference rates. Based on a weighted average of household and corporate loan and deposit spreads over appropriate risk-free rates. Indexed to equal zero in 2007 Q3.
- (s) Annual average. Per cent of potential GDP. A negative figure implies output is below potential and a positive figure that it is above.
- (t) Real GDP (ABMI) divided by total 16+ employment (MGRZ). Although LFS employment data have 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 (see Box D in the May 2024 Monetary Policy Report).
- (u) Four-quarter growth in the ILO definition of employment in Q4 (MGRZ). Although LFS employment data have 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 (see Box D in the May 2024 Monetary Policy Report).
- (v) Four-quarter growth in Q4. LFS household population, all aged 16 and over (MGSL). Growth rates are interpolated between the LFS and ONS National population projections: 2021-based interim within the forecast period.
- (w) ILO definition of unemployment rate in Q4 (MGSX). Although LFS unemployment data have 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 (see Box D in the May 2024 Monetary Policy Report).
- (x) ILO definition of labour force participation in Q4 as a percentage of the 16+ population (MGWG). Although LFS participation data have 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 (see Box D in the May 2024 Monetary Policy Report).
- (y) Four-quarter inflation rate in Q4.
- (z) Four-quarter inflation rate in Q4 excluding fuel and the impact of MTIC fraud.
- (aa) Contribution of fuels and lubricants and gas and electricity prices to four-quarter CPI inflation in Q4.
- (ab) Four-quarter growth in Q4. Private sector average weekly earnings excluding bonuses and arrears of pay (KAJ2).
- (ac) Four-quarter growth in private sector regular pay-based unit wage costs in Q4. Private sector wage costs divided by private sector output at constant prices. Private sector wage costs are average weekly earnings (excluding bonuses) multiplied by private sector employment.
Box A: Alternative cases for the persistence of domestic inflationary pressures
In the forecast, conditioned on the market path for interest rates, CPI inflation is expected to rise to around 2¾% by the second half of 2025 before falling back to around the 2% target in the medium term. There are significant risks around how the economy will evolve, however, particularly around the pace at which domestic inflationary pressures will unwind.
As set out in the September MPC minutes, the Committee’s recent policy deliberations have been supported by the consideration of three cases that impact the evolution of inflation persistence. The forecast is based on the second case, in which a period of economic slack is required in order for pay and price-setting dynamics to normalise fully (Section 1.2).
To understand better some of the uncertainties around the forecast, this box explores in more detail the two other cases for how the persistence of inflationary pressures may evolve. In these cases, inflationary pressures may prove to be either less persistent or more persistent than in the forecast. The box expands on some potential economic mechanisms underpinning these cases and the evidence that could support the economy developing in line with them. It also sets out the possible monetary policy implications.
The alternative cases described in this box are not necessarily mutually exclusive. Some portion of the remaining persistence in inflation may dissipate quickly in line with the first case, while some portion of it may reflect lasting changes in the structure of the economy in line with the third case.
In the first case, the unwinding of global shocks may continue to feed through to weaker pay and price-setting dynamics, without the need for a period of economic slack.
CPI inflation has fallen sharply since 2022 as energy and food price shocks have waned and global goods price inflation has fallen back. But indirect and second-round effects of higher inflation have generated persistence in domestic inflationary pressures.
In the first case, the unwinding of the global shocks that drove up inflation and the resulting fall in headline inflation may continue to feed through to weaker pay and price-setting dynamics, without the need for a period of economic slack to emerge.
In this case, the remaining persistence in domestic inflationary pressures may simply be the result of lagged effects from the global shocks that drove up inflation. As such, persistence may dissipate as the unwinding of those global shocks, and the resulting fall in headline inflation and inflation expectations, continue to return pay and price-setting dynamics to levels consistent with the inflation target. In this case, second round effects might be expected to unwind faster than in the forecast (Section 1.2).
Several developments may be consistent with this first case arising.
There are several data developments that may be consistent with pay and price-setting dynamics normalising relatively quickly. As global shocks have unwound, world export price and producer price inflation have fallen back (Sections 2.1 and 2.4), and that has contributed to an easing in UK firms’ non-labour cost growth.
While pay growth remains elevated, there are some signs that it will normalise as the lagged effects from the global supply shocks continue to feed through. Mirroring the falls in headline inflation, many indicators of households’ and firms’ inflation expectations have normalised to around their 2010 to 2019 averages (Section 2.5). And conditions in the labour market have eased, although they appear relatively tight by historical standards (Section 2.4). One model estimated by Bank staff (Chart 2.30), which allows for quite long lags between inflation expectations and wage growth, as well as accounting for developments in productivity and labour market slack, can fully explain current wage growth. Related, evidence from the DMP Survey suggests that, on average, firms tend to set wages less frequently than prices, which could be consistent with there being some lags in the pass-through of recent developments to wage growth.
Some developments in firms’ price-setting behaviour appear consistent with inflationary pressures continuing to dissipate as wage pressures ease. As described in Section 2.5 for example, intelligence from the Bank’s Agents suggests that companies’ margins are likely to remain compressed in coming quarters. Price pressures also appear to be fading more quickly than businesses had expected a year ago. Firms’ own price inflation, as reported in the Bank’s DMP Survey, has on average been 0.6 percentage points lower over 2024 than they expected a year previously.
In the third case, the economy may have been subject to structural shifts in wage and price-setting behaviour following the major supply shocks experienced over recent years.
In the third case, there is a risk that the economy has been subject to lasting changes in wage and price-setting following the major supply shocks experienced over recent years. These changes in wage and price-setting behaviour may lead to a more lasting rise in inflation persistence.
One mechanism that could cause this to arise is if some domestic firms and employees continue to seek higher nominal selling prices and higher pay to recover any reductions in real income that they have experienced in the past. Analysis by Bank staff suggests that, while real incomes have risen on average since 2019 (Section 2.3), workers in some sectors, and in some parts of the wage distribution, have experienced a reduction in real incomes relative to others over that period. At present, for example, the dispersion in real wage growth experienced since 2019 Q4 across sectors is greater than seen over the same time span prior to the pandemic. And wage growth in the lower deciles of the income distribution has outpaced that of other deciles, in part due to the notable rises in the National Living Wage (NLW) (Section 2.5). If workers seek to re-establish previous pay differentials, that could result in more persistent strength in wage growth.
If this mechanism were at play, it would result in a stronger outlook for wage growth for any given level of unemployment. This could be broadly equivalent to a further shift up in the medium-term equilibrium rate of unemployment, resulting in a reduction in the potential growth rate of supply relative to the forecast.
Employers are more likely to re-establish pay differentials if the labour market remains relatively tight. As outlined in Box F, contacts of the Bank’s Agents who expect higher wages and prices to persist for longer cited the possible role of factors such as Covid and Brexit in lowering labour supply. Alongside labour market tightness, firms’ ability to raise prices in order to preserve their margins will depend on the strength in demand (Section 2.5).
A range of developments may support this third case materialising.
There are some signs in the data that, were they to continue, may be consistent with this case. While annual CPI inflation has fallen below the MPC’s 2% target, wages and services price inflation remain elevated (Section 2.5). And, although both of these are expected to moderate gradually in the forecast, some indicators suggest that the pace of normalisation may have slowed. Firms’ year ahead expectations for wage growth reported in the Bank’s DMP Survey, for example, have remained around 4% over recent months (Chart 2.31), and analysis by Bank staff suggests that firms’ expectations are skewed to the upside of that estimate. In addition, while the labour market has eased, it appears relatively tight by historical standards, with measures such as the vacancies to unemployment ratio still slightly elevated (Chart 2.19).
As noted above, increases in the NLW will have narrowed pay differentials between those on the NLW and those paid above it. While the estimated effect of the NLW in the aggregate pay data appears to have been fairly limited so far, some contacts of the Bank’s Agents report that they are coming under pressure to maintain pay differentials between scales. Bank staff’s estimate of the effects of the 2024 NLW (Section 2.5) incorporates some degree of spillovers from this channel based on what has occurred over the past, although, given the size of the 2024 and 2025 NLW increases, there is a risk that these spillovers could be larger than in previous years.
Some aspects of firms’ price-setting behaviour may also be consistent with persistent inflationary pressures remaining. The share of prices that are changed in any given month, for example, has remained elevated (Chart 2.25). Prior to the pandemic, a broadly stable share of services prices were increased and decreased each month, but the net share of services price quotes in the CPI increasing each month rose sharply in 2022 and has remained notably high. In addition, to the extent that profit margins have fallen in recent years (Section 2.5), as relatively soft consumer demand has constrained firms’ ability to fully pass through cost rises, there is a risk that firms will seek to rebuild their margins. There is limited evidence of this occurring in the data so far, however.
Both alternative cases would necessitate different future monetary policy stances to ensure that inflation is returned sustainably to target.
If pay and price-setting dynamics were to normalise more quickly than expected, as in the first case, the lower degree of inflationary pressures would require a less restrictive future stance of monetary policy than would be implied by the forecast. And if these dynamics were subject to lasting change, as in the third case, policy would need to be somewhat more restrictive.
The MPC will continue to monitor closely the risks around inflation persistence.
The Committee will continue to monitor the accumulation of evidence from a broad range of indicators of inflation persistence, including evidence that could point to either of the alternative cases laid out in this box having begun to materialise.
Box B: Autumn Budget 2024
The Government has set out its tax and spending plans in Autumn Budget 2024, published on 30 October. This box outlines the broad composition of the fiscal measures announced in the Budget and how these have been incorporated provisionally into the MPC’s projections. The Committee will monitor the impact of the Budget, including ahead of its next forecast round in February.
The Government has adopted a new set of fiscal rules.
The Government announced new fiscal rules in Autumn Budget 2024. The Government’s updated Fiscal Mandate requires the current budget, defined as revenues minus day-to-day expenditure, to be in surplus by fiscal year 2029–30. In addition, net financial debt, as measured by public sector net financial liabilities (PSNFL), is required to be falling as a share of GDP by 2029–30. Once 2029–30 becomes the third year of the forecast, both rules will then need to be met by the third year of a rolling forecast period. The OBR has judged that, under the plans laid out in Autumn Budget 2024, the Government will meet both fiscal rules two years earlier than required. The OBR expects that the requirement for the current budget to be in surplus will be met by a margin of around £10 billion in 2029–30.
Higher expenditure is partly offset by higher taxation.
The fiscal plans outlined in Autumn Budget 2024 represent a substantial near-term loosening of fiscal policy compared with the plans outlined by the previous Government in March. Public sector net borrowing (PSNB) is now projected by the OBR to decline from 4.5% of GDP in 2024–25 to 2.1% in 2029–30 (left-hand panel of Chart A). Relative to the OBR’s March forecast, PSNB is projected to be around 1 percentage point higher as a share of GDP on average over the next three years, equivalent to around £30 billion per year (right-hand panel of Chart A). The effects of new policy announcements raise government expenditure on average by around £70 billion per year from 2025–26 onwards compared with the OBR’s March projections, of which two thirds is accounted for by higher current expenditure (pink bars) and one third by higher capital expenditure (green bars). Higher expenditure is partly offset by taxation measures which, relative to previous plans, are projected to raise receipts by an average of £36 billion per year from 2025–26 onwards (blue bars).
Chart A: Public sector net borrowing is projected to be higher than under the OBR’s March projections
Public sector net borrowing (PSNB), as a percentage of GDP (left panel) and contributions to change in the OBR’s PSNB projection between March 2024 and October 2024 (right panel) (a)
The largest change to taxation was an increase in employer National Insurance contributions (NICs), which is forecast to raise £26 billion by 2029–30. From April 2025 onwards, the NICs rate that firms pay will increase from 13.8% to 15%. And the threshold at which NICs are levied on employers will be lowered from £9,100 to £5,000. This is partially offset by an increase in the generosity of the Employment Allowance which employers can claim on their NICs liabilities. The Budget included a number of measures that raise receipts, including changes to capital gains tax and inheritance tax, reforms to the taxation of non-domiciled individuals and the introduction of VAT on private school fees.
Budget spending policies raise current expenditure by £23 billion in 2024–25 relative to the OBR’s March forecast, reflecting a combination of funding for previous spending pressures and the cost of new measures announced on 30 October. Current expenditure is then around £45 billion per annum higher over the remainder of the OBR’s five-year forecast period, relative to its March forecast. In real terms, annual departmental current expenditure growth is expected to be 5.5% and 3.5% in 2024–25 and 2025–26, respectively, after which it slows to 1.3% per annum.
Capital expenditure is also higher than assumed in the OBR’s March forecast. In real terms, capital spending is set to rise by 9.9% in 2025–26, up from 4.5% in the OBR’s March projection, before slowing across the remaining years of the forecast.
The National Living Wage will increase by 6.7% in 2025.
The Government has accepted the recommendation of the Low Pay Commission regarding the 2025 uplift for the National Living Wage (NLW). In line with this, it has announced a 6.7% increase in the NLW main rate in April 2025. That is somewhat lower than the 9.8% increase in April 2024 (Section 2.5).
Measures announced at Autumn Budget 2024 are expected to boost GDP growth over the MPC’s forecast period.
The MPC’s projections are conditioned on the Government’s tax and spending plans set out in Autumn Budget 2024. The impacts of the measures included in the Autumn Budget have been estimated using multipliers, which capture the total effect of fiscal policy changes on GDP, including via indirect effects on private incomes and spending. These fiscal multipliers vary according to the type of measure. For further details see the May 2021 Report.
The combined effects of the new measures announced in Autumn Budget 2024, including the additional funding for previous spending pressures, are provisionally expected to boost the level of GDP by around ¾% at their peak in a year’s time relative to the August Report projections. This reflects the stronger, and relatively front-loaded, paths for government consumption and investment more than offsetting the impact on growth of higher taxes.
The increase in employer NICs is assumed to lead to a small decrease in potential supply over the forecast period. That reflects an assumption that employers will pass some of the rise in NICs through to wages, which results in slightly lower labour supply through reduced labour market participation. Broader uncertainties surrounding the aggregate impacts from the NICs increase on growth and inflationary pressures in the economy are discussed in Section 1.2.
Additional public investment would, if sustained, be expected to increase the productive capacity of the economy in the long run. The impact on potential supply of the public investment announced in the Budget is provisionally expected to be very small over the MPC’s forecast period, and to build thereafter. Overall, the changes announced in the Budget are expected to reduce the margin of spare capacity in the economy over the MPC’s forecast period.
The combined effects of the measures included in the Budget are provisionally expected to boost CPI inflation by just under ½ of a percentage point at their peak relative to the projection in the August Report (Chart B). In the near term, the direct effects of the rise in the cap on single bus fares from £2 to £3 and the introduction of VAT on private school fees from January, and the increase in Vehicle Excise Duty from April, push up the MPC’s projection for CPI inflation from 2025 Q1 and Q2 (purple bars). The increase in employer NICs is also assumed to have a small upward impact on inflation. These effects are partly offset by the 5p cut and extension of the freeze in fuel duty rates from March and April 2025, respectively (orange bars). Further out, the 5p cut is assumed to expire and fuel duty is assumed to rise in line with RPI inflation from 2026 Q2, such that it pushes up the MPC’s CPI inflation projection in the year from that point. The assumed reduction in excess supply due to the Budget also raises the projection for CPI inflation (aqua bars).
Chart B: Policies included in the Budget are expected to raise CPI inflation by just under ½ of a percentage point at their peak
Impact of Budget on CPI inflation forecast (a)
Footnotes
- (a) The ‘other Budget effects’ bars account for the effects of the rise in the cap on single bus fares, the rise in vehicle excise duty, the introduction of VAT on private school fees and Bank staff’s estimates for the CPI impact of the change in employer NICs. The ‘fuel duty’ bars account for the extension of the freeze and the 5p cut to fuel duty rates, followed by the assumption that the 5p cut will expire and fuel duty will rise in line with RPI from 2026 Q2. The ‘spare capacity’ bars capture the impact on inflation of changes to excess supply as a result of fiscal policy.
Box C: Monetary policy since the August 2024 Report
At its meeting ending on 18 September 2024, the MPC voted by a majority of 8–1 to maintain Bank Rate at 5%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 4.75%. The Committee voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, by £100 billion over the next 12 months, to a total of £558 billion.
Monetary policy decisions had been guided by the need to squeeze persistent inflationary pressures out of the system so as to return CPI inflation to the 2% target both in a timely manner and on a lasting basis. Policy had been acting to ensure that inflation expectations remained well anchored. As set out at the time of the August Monetary Policy Report, the Committee’s deliberations had been supported by the consideration of a range of cases, to which different probabilities and different risks could be attached.
In the first case, the unwinding of the global shocks that drove up inflation and the resulting fall in headline inflation should continue to feed through to weaker pay and price-setting dynamics. The persistence of inflationary pressures would therefore dissipate with a less restrictive stance of monetary policy than in other cases.
In the second case, a period of economic slack, in which GDP fell below potential and the labour market eased further, might be required in order for pay and price-setting dynamics to normalise fully. Domestic inflationary persistence would then be expected to fade away, owing to the opening up of slack from a more restrictive stance of monetary policy relative to the first case.
In the third case, the economy might be subject to structural shifts such as changes in wage and price-setting following the major supply shocks that had been experienced over recent years. The degree of restrictiveness of monetary policy might be less than embodied in the Committee’s latest assessment, meaning that monetary policy would have to remain tighter for longer.
Since the MPC’s August meeting, global activity growth had continued at a steady pace, although some data outturns suggested greater uncertainty around the near-term outlook. Oil prices had fallen back, reflecting in large part weaker demand. Market-implied paths for policy rates across major advanced economies had declined.
There had generally been limited news in UK economic indicators relative to the Committee’s expectations in the August Monetary Policy Report. Headline GDP growth was expected to return to its underlying pace of around 0.3% per quarter in the second half of the year. Twelve-month CPI inflation had been 2.2% in August, and was expected to increase to around 2½% towards the end of this year as declines in energy prices last year fell out of the annual comparison. Services consumer price inflation had remained elevated at 5.6% in August. Private sector regular average weekly earnings growth had declined to 4.9% in the three months to July.
In the absence of material developments, a gradual approach to removing policy restraint remained appropriate. Monetary policy would need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term had dissipated further. The Committee continued to monitor closely the risks of inflation persistence and would decide the appropriate degree of monetary policy restrictiveness at each meeting.
2: Current economic conditions
Global GDP continues to grow steadily at rates a little below pre-Covid averages. Headline consumer price inflation has fallen across advanced economies over the past two years, with services inflation and wage growth still elevated but slowly moderating. The market-implied paths for interest rates on which the November forecast is conditioned are consistent with a faster near-term pace of cuts across advanced economies than was the case three months ago.
UK GDP grew by 0.5% in 2024 Q2, slightly below expectations in the August Report. Underlying momentum in demand is judged to be a little weaker than this, at around ¼% per quarter. GDP growth is projected to have slowed somewhat in the second half of 2024 to around that underlying rate, consistent with the steer from a range of business surveys.
The labour market has continued to ease but appears relatively tight by historical standards. Large uncertainties remain around the LFS labour market statistics. Bank staff’s indicator-based models suggest that employment growth has remained positive, while unemployment has been roughly flat. Aggregate demand and supply in the economy appear to remain broadly in balance.
CPI inflation has fallen since the August Report and was 1.7% in September, slightly below the MPC’s 2% target. Goods price inflation has been muted, reflecting past declines in external cost pressures. Services price inflation remains elevated but was lower than expected in the August Report at 4.9% in September. Headline CPI inflation is projected to rise to 2.5% by the end of the year, as the drag on annual inflation from lower domestic energy bills wanes, before rising somewhat further over 2025 (Section 1).
Annual private sector regular average weekly earnings (AWE) growth has fallen back but remained elevated at 4.8% in the three months to August. Annual private sector wage inflation is expected to slow further in 2025.
Chart 2.1: In the MPC’s latest projections, headline GDP growth falls back slightly and the unemployment rate is flat in the second half of this year; CPI inflation rises moderately in Q4
Near-term projections (a)