Thursday, December 16, 2021 / 5:00 PM / by Bank of England / Header Image Credit: iStock

Monetary Policy Summary,December 2021

The Bank of England's Monetary Policy Committee (MPC)sets monetary policy to meet the 2% inflation target, and in a way that helpsto sustain growth and employment. At its meeting ending on 15 December 2021,the MPC voted by a majority of 8-1 to increase Bank Rate by 0.15 percentagepoints, to 0.25%. The Committee voted unanimously for the Bank of England tomaintain the stock of sterling non-financial investment-grade corporate bondpurchases, financed by the issuance of central bank reserves, at 20 billion Pounds.The Committee also voted unanimously to maintain the stock of UK governmentbond purchases, financed by the issuance of central bank reserves, at 875billion Pounds, and so the total target stock of asset purchases at £895 billion.

In the MPC's central projections in the NovemberMonetary Policy Report, global and UK GDP were expected to recover further fromthe effects of Covid-19 (Covid) in the near term. Conditioned on the risingpath for Bank Rate expected by financial markets at that time, upward pressureon CPI inflation was expected to dissipate over time, as supply disruptioneased, global demand rebalanced from goods to services, and energy pricesstopped rising. Earnings growth was also expected to fall back from its currentrate. As a result, inflation was projected to fall back materially from thesecond half of next year.

Since the November MPC meeting, the Omicron Covidvariant has emerged. It appears to be spreading rapidly within the UnitedKingdom and around the world. The new variant appears to be much moretransmissible than the Delta variant and, on the basis of current knowledge,poses new risks to public health. Global risky asset prices fell in response tothis news but have since largely recovered. Longer-term advanced-economygovernment bond yields have declined.

The level of global GDP in 2021 Q4 is likely to bebroadly in line with the November Report projection, but consumer priceinflation in advanced economies has risen by more than expected. The Omicronvariant poses downside risks to activity in early 2022, although the balance ofits effects on demand and supply, and hence on medium-term global inflationarypressures, is unclear. Global cost pressures have remained strong.

Bank staff have revised down their expectations forthe level of UK GDP in 2021 Q4 by around ½% since the November Report, leavingGDP around 1½% below its pre-Covid level. Growth in many sectors has continuedto be restrained by disruption in supply chains and shortages of labour. Theimpact of the Omicron variant, associated additional measures introduced by theUK Government and Devolved Administrations, and voluntary social distancingwill push down on GDP in December and in 2022 Q1. The experience since March2020 suggests that successive waves of Covid appear to have had less impact onGDP, although there is uncertainty around the extent to which that will proveto be the case on this occasion.

The Labour Force Survey unemployment rate fell to 4.2%in the three months to October, while the number of payrolled employeescontinued to rise strongly in November. There is little sign in the availabledata that the closure of the Coronavirus Job Retention Scheme at the end ofSeptember has led to a weakening in the labour market. The LFS unemploymentrate is now expected to fall to around 4% in 2021 Q4, compared with the 4½%projection in the November Report. Bank staff continue to estimate that underlyingearnings growth has remained above pre-pandemic rates, and the Committeecontinues to see upside risks around the projection for pay in the NovemberReport.

Twelve-month CPI inflation rose from 3.1% in Septemberto 5.1% in November, triggering the exchange of open letters between theGovernor and the Chancellor of the Exchequer that is being published alongsidethis monetary policy announcement. Relative to the November Report projection,there has been significant upside news in core goods and, to a lesser extent,services price inflation. Bank staff expect inflation to remain around 5%through the majority of the winter period, and to peak at around 6% in April2022, with that further increase accounted for predominantly by the laggedimpact on utility bills of developments in wholesale gas prices. Indicators ofcost and price pressures have remained at historically elevated levelsrecently, and contacts of the Bank's Agents expect further price increases nextyear driven in large part by pay and energy costs. CPI inflation is stillexpected to fall back in the second half of next year.

The MPC's remit is clear that the inflation targetapplies at all times, reflecting the primacy of price stability in the UKmonetary policy framework. The framework also recognises that there will beoccasions when inflation will depart from the target as a result of shocks anddisturbances. In the recent unprecedented circumstances, the economy has beensubject to very large and repeated shocks. Given the lag between changes inmonetary policy and their effects on inflation, the Committee, in judging theappropriate policy stance, will as always focus on the medium-term prospectsfor inflation, including medium-term inflation expectations, rather thanfactors that are likely to be transient.

At its November meeting, the Committee judged that,provided the incoming data, particularly on the labour market, were broadly inline with the central projections in the November Monetary Policy Report, itwould be necessary over coming months to increase Bank Rate in order to returnCPI inflation sustainably to the 2% target. Recent economic developmentssuggest that these conditions have been met. The labour market is tight and hascontinued to tighten, and there are some signs of greater persistence indomestic cost and price pressures. Although the Omicron variant is likely toweigh on near-term activity, its impact on medium-term inflationary pressuresis unclear at this stage.

The Committee judges that an increase in Bank Rate of0.15 percentage points is warranted at this meeting.

The MPC will review developments, including emergingevidence on the implications for the economy of the Omicron variant, as part ofits forthcoming forecast round ahead of the February 2022 Monetary PolicyReport. The Committee will, as always, continue to focus on the medium-termprospects for inflation. The Committee continues to judge that there aretwo-sided risks around the inflation outlook in the medium term, but that somemodest tightening of monetary policy over the forecast period is likely to benecessary to meet the 2% inflation target sustainably. The Committee will reachits assessment on the balance of the risks to medium-term inflation in light ofthe relevant data as they emerge.

Minutes of the MonetaryPolicy Committee meeting ending on 15 December 2021

1) Before turning to its immediate policy decision,the Committee discussed: the international economy; monetary and financialconditions; demand and output; and supply, costs and prices.

The international economy

2) UK-weighted world GDP was expected to grow by 0.8%in 2021 Q4, broadly in line with the projection in the November Monetary PolicyReport. Supply disruptions, and an increase in Covid-19 (Covid) cases withassociated measures, were expected to weigh on euro-area activity, while the USeconomy was expected to grow more strongly than had been anticipated. Comparedto pre-Covid levels, demand for goods had continued to be strong relative toservices in the United States, with US households driving almost the entireincrease in durable goods consumption across G7 economies over that period. Theemergence and spread of the Omicron Covid variant posed downside risks to theglobal recovery in activity, with the overall effect on inflation unclear.

3) In the euro area, GDP had risen by 2.2% in 2021 Q3 accordingto the third release, a little stronger than incorporated into the NovemberReport, and leaving the level of GDP only 0.3% below that in 2019 Q4. Bankstaff expected GDP to grow by 0.5% in the fourth quarter, slower than had beenanticipated in the November Report. Even prior to the emergence of the Omicronvariant, Covid cases had risen sharply across the region, and several countrieshad tightened measures during November and December. The composite output PMIhad increased to 55.4 in November, driven by a pickup in services output, butmobility indicators had fallen back recently. Supply bottlenecks had alsoweighed on production, although the manufacturing output PMI had remained inexpansionary territory. The euro-area unemployment rate had decreased slightlyin October, to 7.3%, and euro-area wage growth had remained moderate in 2021Q3.

4) In the United States, GDP had increased by 0.5% in2021 Q3 according to the second estimate, weaker than had been expected in theNovember Report. This had left the level of GDP 1.4% higher than in 2019 Q4. Inthe fourth quarter, US GDP was expected to expand by 1.4%, higher thananticipated in the November Report. Household spending had grown strongly inOctober, although the expected rotation of demand towards services had stalled.Strength in goods spending had continued, particularly durables expenditure,which had increased again after declining earlier in the year as fiscal supporthad faded. In the labour market, non-farm payrolls had grown by only 210,000 inNovember, but the unemployment rate had fallen to 4.2%. Wage growth had pickedup across a number of indicators, but had remained broadly in line withpre-Covid rates after adjusting for compositional and demographic effects.

5) In China, localised Covid outbreaks and associatedmeasures had weighed on activity. GDP was expected to grow by 1.0% in 2021 Q4,a little below the estimate in the November Report. The housing market hadcontinued to weaken. In other emerging markets, activity had generally pickedup in 2021 Q3, although there had been differences across countries.

6) Global cost pressures had remained strong andinflation had risen by more in advanced economies than had been expected in theNovember Report. In November, euro-area annual HICP inflation had increased to4.9%. US CPI inflation had reached 6.8%, consistent with PCE inflation ofaround 5½% in November. Strong demand for certain goods, supply disruptions andhigh energy prices had been behind these increases.

7) The MPC discussed the outlook for global inflation.Price pressures in the United States had broadened across sectors, and priceshad not fallen back to the extent anticipated in the sectors that hadpreviously experienced the largest increases. There had been mixed signals fromearly indicators of cost pressures. Wholesale gas spot prices had risen againin Europe and one-year futures prices had reached new highs. Oil and coalprices had declined from their peak, with the Brent oil spot price now around$73 per barrel. Shipping costs had remained elevated, but Chinese PMImanufacturing input prices had eased in the latest data. Indices of prices anddelivery times in the United States and in the euro area had still indicatedstrong pressures, however, and US and euro-area companies had reported higherlevels of material shortages. China's zero-Covid strategy alongside theemergence of Omicron could also lead to renewed supply disruptions goingforward if, for example, ports and factories were to close.

Monetary and financial conditions

8) In response to news of the emergence and spread ofthe Omicron variant, global risky asset prices had fallen somewhat, but hadsince largely recovered. Global equity prices had declined by around 3 to 5% inthe days following the initial news, with larger declines in sectors that hadbeen most affected by previous Covid measures. Global corporate bond spreadshad also widened, albeit from low levels. Implied volatilities had risen acrossasset classes. Overall, these moves had been relatively modest, however, andhad unwound subsequently in some cases.

9) Longer-term advanced-economy government bond yieldshad also fallen in response to news of the Omicron variant. In the UnitedStates, some of that fall had unwound subsequently, leaving ten-year USgovernment bond yields around 10 basis points lower overall since the MPC'sNovember meeting. In contrast, in the United Kingdom and the euro area,ten-year government bond yields had fallen by around 20 to 30 basis pointssince the Committee's previous meeting. Those falls had largely been accountedfor by a reduction in the real component of nominal interest rates.

10) The path for market-implied policy rates in theUnited States had risen somewhat since the MPC's previous meeting. In part, thatwas likely to have reflected US CPI data and Federal Open Market Committee(FOMC) communications. At its 3 November meeting, the FOMC had left its targetrange for the federal funds rate unchanged and had begun to reduce the monthlypace of its asset purchases. The minutes of that FOMC meeting had noted thatsome participants preferred a somewhat faster pace of reductions that wouldresult in an earlier conclusion to net purchases, an option which Chair Powellhad noted subsequently he expected would be discussed again at the FOMC'sforthcoming meeting on 15 December. The market-implied policy rate in theUnited States now reached around 0.7% by end-2022 and 1.3% by end-2023, around10 basis points higher than immediately prior to the MPC's November meeting. Incontrast, the market-implied path for policy rates in the euro area had moveddown a little over the same period.

11) In the United Kingdom, market-implied expectationsfor the path of Bank Rate had fallen sharply immediately following the MPC's Novembermeeting. Market contacts were expecting Bank Rate to rise in the coming months.In the days running up to the MPC's December meeting, most contacts hadexpected Bank Rate to remain at 0.1% at this meeting. Following the UK CPIrelease on 15 December, however, market pricing had become more finely balancedbetween Bank Rate remaining at 0.1% and an increase of 15 basis points at thismeeting. Further out, the market-implied path for Bank Rate reached 1.1% by theend of 2022. Volatility in UK short-term interest rate markets had remainedelevated since the Committee's previous meeting, in part reflecting diminishedmarket liquidity, some of which was expected to persist over the year-endperiod.

12) Medium-term inflation compensation measures in theUnited Kingdom had remained above their average levels of the past decade. Thatcontrasted with similar measures in the United States and the euro area whichhad been around their average levels of the past decade.

13) As the Committee had discussed at its previousmeeting, interpreting UK medium-term inflation compensation measures was notstraightforward. The use of UK inflation markets for hedging large pensionliabilities and the uncertain future wedge between consumer price and RPIinflation meant that inflation compensation measures did not provide a directread of market participants' fundamental views on the inflation outlook.Nevertheless, models that attempted to extract medium-term market expectationsfor CPI inflation, and intelligence gathered from market contacts, suggestedthat higher inflation expectations and greater perceived risks to inflationmight have in part accounted for the above-average levels of medium-terminflation compensation measures, alongside other factors.

14) The sterling effective exchange rate index hadfallen by around 1% since the MPC's previous meeting, with a somewhat sharperdepreciation of sterling against the dollar of around 3%.

15) Moves in lending rates on UK mortgages had beenmixed since the Committee's previous meeting. Interest rates on mortgages withloan-to-value (LTV) ratios at or below 75% had risen by around 30 basis pointsfrom their recent low points. This was consistent with a lagged response to theincreases in risk-free rates since the autumn, with around half of thoseincreases now having passed through to lending rates. Higher LTV mortgage rateshad continued to fall since the Committee's previous meeting, albeit at aslower pace. There had been a normalisation in housing activity measuresfollowing the end of the stamp duty holiday, while indicators of house priceinflation had remained robust.

16) At its December 2021 meeting, the Bank's FinancialPolicy Committee (FPC) had announced an increase in the UK countercyclicalcapital buffer rate from 0% to 1%, coming into effect from 13 December 2022 inline with the usual twelve-month implementation period. It would also expect toincrease the rate further to 2% in 2022 Q2, if the UK economic recoveryproceeded broadly in line with the MPC's central projections in the NovemberMonetary Policy Report, and absent a material change in the outlook for UKfinancial stability. The FPC had also reviewed its mortgage market Recommendations,including considering how its measures had operated since they had been put inplace. The FPC's analysis had suggested that its loan to income (LTI) flowlimit played a stronger role than its affordability test in guarding against anincrease in aggregate household indebtedness and the number of highly indebtedhouseholds when house prices rose rapidly. The FPC had therefore decided tomaintain the LTI flow limit Recommendation, but to consult, in the first halfof 2022, on withdrawing its affordability test.

Demand and output

17) According to the ONS's first quarterly estimate,UK GDP had risen by 1.3% in 2021 Q3, a little weaker than the 1.5% projectionthat had been incorporated into the November Monetary Policy Report. That hadleft the level of Q3 GDP 2.1% below its pre-Covid level in 2019 Q4. Withinthat, the initial estimates of private consumption and investment growth, whichwere often subject to revision, had been materially lower than expected. Totalgovernment expenditure had risen by 1.3%, higher than had been expected in theNovember Report. The sum of the Q3 expenditure components had beensignificantly less than headline GDP, indicating uncertainty surrounding theexpenditure estimates and the possibility of an upward revision to spending inforthcoming releases.

18) GDP growth in October had been a little weakerthan expected, at 0.1%. In both September and October, growth had been drivenin part by increases in health spending, reflecting strong non-Covid activitysuch as doctor appointments. There had also been growth in transport andwork-related activities, which had reflected the return of workers to officesand higher mobility in general. By contrast, output in somebusiness-to-business services, such as information and communications, andfinance, had weakened. Construction output had fallen in October, although thishad followed a sharp rise in September.

19) Supply chain disruptions had remained acute, butdid not appear to have weighed on activity by more than had been anticipated inthe November Report. This was consistent with there having been little news tothe level of output in those sectors that had previously been most affected bydisruptions, such as manufacturing and construction. The global semiconductor shortagehad continued to weigh on car production in particular, and there had beenevidence that low availability had constrained new car purchases. According tothe latest IHS Markit/CIPS manufacturing PMI surveys, supplier delivery timeshad continued to lengthen in November, and backlogs of work had continued torise. Other indicators had also shown no easing in supply chain disruptions.The proportion of firms reporting non-labour input disruptions and significantrecruitment difficulties in the November Decision Maker Panel had increasedslightly, and the Bank's Agents had reported an increase in the number ofcontacts reporting constraints to growth, primarily due to labour shortages butalso demand for goods becoming harder to fulfil due to supply chaindisruptions. An increasing number of Agents' contacts had also reported thatthey expected supply issues to persist until the second half of 2022, andpossibly 2023 or 2024 in some cases.

20) Retail sales volumes had increased in October,leaving the level of sales around 5½% above its pre-Covid level. Someindicators of card spending suggested retail spending had remained robust inNovember. The Bank's Agents had reported companies' concerns about being ableto meet demand for Christmas, and that a lack of stock availability wasreducing consumer choice. Looking ahead, the emergence and spread of theOmicron variant was likely to encourage goods, relative to services, spending,as the goods-to-income ratio had returned to around its pre-Covid level.

21) The number of Covid cases had picked up in thedays leading up to the MPC's December meeting. With the identification of theOmicron variant, measures had been put in place in England at the end ofNovember and during the first few days of December. On 8 December, the UKGovernment had announced that additional measures would be introduced forEngland, including: guidance on working from home wherever possible; extendingthe legal requirement to wear a face covering to further public venues; dailytesting for contacts of Omicron cases; and the introduction of Covid passes fornightclubs as well as events with large crowds. In the devolved nations, anumber of measures were already in place, such as wearing face coverings inpublic places, advice to work from home and Covid passes. On 12 December, theUK Coronavirus alert level had been raised to level four, as transmission ofthe new variant was judged to be high or rising exponentially, and the UKGovernment had announced a plan for all those eligible in England to be offereda booster vaccine by the end of this year, while offering additional support toDevolved Administrations to accelerate their vaccination programmes. On 14December, the UK Government had announced that it would remove the countries onthe UK's travel red list and, in Scotland, people had been advised to limitsocialising to three households and physical distancing measures in shops andhospitality venues had been re-introduced.

22) There had been some tentative signs that economicactivity had started to be affected by the emergence and spread of Omicron inlate November. The number of OpenTable seated diners had fallen in recentweeks, although some of this had probably reflected the impact of storm Arwenat the end of November. UK retail footfall and passenger flight numbers hadbeen flat on the weeks to 4 and 5 December respectively. However, mobility datahad suggested a moderate decline in public transport use in early December.

23) Overall, Bank staff had revised down theirexpectations for 2021 Q4 GDP growth to 0.6%, from 1% at the time of theNovember Report. News to the level of GDP up to October, and the impact fromOmicron and associated measures in December, meant that Bank staff now expectedGDP in Q4 to be around 1½% below its 2019 Q4 level.

Supply, costs and prices

24) The Labour Force Survey unemployment rate hadfallen to 4.2% in the three months to October, 0.2 percentage points belowexpectations at the time of the November Monetary Policy Report. Within that,the number of people who had been unemployed for up to six months had remainedaround its recent record low, although the number of people unemployed for overtwelve months had remained higher than prior to the pandemic. LFS employmenthad increased by 0.5% in the three months to October, to 1.3% below its 2019 Q4level, slightly weaker than expected in the November Report. Her Majesty'sRevenue and Customs (HMRC) employee payrolls had risen strongly by 257,000 inthe single month of November, although these initial estimates had tended to berevised down somewhat. Payrolls growth had been revised down in October, forexample, from 160,000 to 74,000. Overall, there was little sign in theavailable official data that the closure of the Coronavirus Job Retention Scheme(CJRS) at the end of September had led to a weakening in the labour market.Average hours worked had continued to increase in the three months to October,as those on furlough had returned to work, and were now only just over 1% belowtheir 2019 Q4 level. The LFS inactivity rate had been unchanged in the threemonths to October, and was still around ¾ percentage points higher thanimmediately prior to the pandemic.

25) General government employment, based on returnsfrom public sector organisations, had increased by around 219,000 in 2021 Q3compared with its 2019 Q4 level. LFS flows data suggested that recent increasesin public sector employment could be almost entirely accounted for by movesfrom private sector employment.

26) The stock of job vacancies recorded by the ONS hadreached 1.2 million in the three months to November, and the ratio of vacanciesto unemployment had also reached another record high since a consistent serieshad been available from 2001. Those increases appeared to reflect strong demandfor labour, as labour market flows data up to 2021 Q3 had shown a similarlystrong pace of new hiring. The implied average duration of vacancies and Bankstaff estimates of labour market matching efficiency had been around pre-Covidlevels.

27) More timely indicators of labour market activityhad generally remained robust. The IHS Markit/CIPS composite employment PMI hadfallen slightly in November, but had remained at a historically elevated level.The REC permanent staff placements and staff availability indices had remainedclose to recent record high and low levels respectively in November. Contactsof the Bank's Agents in a range of sectors had reported wanting to take on morestaff to meet increased demand, and staff turnover had remained higher thannormal for many companies. Recruitment difficulties had also been reported tohave become more widespread and acute, particularly for the hiring ofexperienced staff. Early indications following the emergence and spread ofOmicron in the United Kingdom suggested that Adzuna vacancies had fallen backsomewhat in the hospitality and catering sector.

28) Overall, Bank staff now expected the LFSunemployment rate to fall to around 4% in 2021 Q4, compared with the 4½%projection in the November Report. Abstracting from the risks from the impactof Omicron, it was possible that the unemployment rate could fall further overcoming months if hiring continued to keep pace with the current elevated levelsof vacancies. Any weakness in demand related to the new variant could offsetthose forces to some extent.

29) Private-sector regular Average Weekly Earnings(AWE) had risen by 4.7% in the three months to October on a year earlier,weaker than earlier in the year but broadly in line with expectations at thetime of the November Report. Adjusted for the mechanical effects of the CJRSand changes in composition, Bank staff estimated that private sector regularpay growth had remained at around 4½%, above pre-pandemic rates of around 3%.

30) Other pay indicators had remained strong,consistent with a continuation of the current pace of underlying earningsgrowth in the near term. The REC permanent staff salaries index, which measuredthe monthly pay growth of new permanent hires, had increased to another recordhigh in November. Job-to-job flows had reached a record high in 2021 Q3, withparticular strength in the number of voluntary resignations. Median pay growthbased on HMRC payrolls data had fallen back somewhat from its peak in mid-2021.Looking ahead, a number of contacts of the Bank's Agents expected furtherupward pressure on pay growth next year, in part as strength in consumer priceinflation could encourage workers to demand higher pay settlements. Overall,should the labour market remain tight, there appeared to be upside risks aroundthe projections in the November Report for earnings growth to fall backsignificantly over the coming year.

31) Twelve-month CPI inflation had risen from 3.1% inSeptember to 5.1% in November, compared with the 4.5% figure expected in theNovember Report. This release had triggered the exchange of open lettersbetween the Governor and the Chancellor of the Exchequer that was beingpublished alongside this monetary policy announcement. Core inflation had alsorisen to 4.0% in November. Relative to the November Report projection, therehad been significant upside news in core goods and, to a lesser extent,services price inflation.

32) CPI inflation was expected to remain around 5%through the majority of the winter period, and peak at around 6% in April 2022.The latter would be around one percentage point higher than had been expectedin the November Report.

33) The further rise in inflation next spring would inlarge part reflect current developments in wholesale gas and electricityfutures prices, which would feed into Ofgem's retail price caps from April.Movements in wholesale prices over much of the period following the NovemberReport had been broadly consistent with Bank staff's baseline assumptions ofhow much these caps were likely to increase, but gas and electricity futuresprices had picked up sharply in the days leading up to the MPC's meeting whichimplied additional upside pressure on utility price inflation if thispersisted. The fall in oil prices since the MPC's previous meeting would have asmall, and only partly offsetting, negative effect on energy price inflationover coming months.

34) Core goods price inflation was expected to remainwell above its pre-Covid average in the near term, accounting for the majorityof the remainder of the projected above-target inflation. Services priceinflation was projected to remain at above pre-Covid rates and increasesomewhat further. Food price inflation was also expected to rise further,reflecting cost increases over recent months.

35) Other indicators of cost and price pressures hadremained at historically elevated levels recently. Both the composite input andoutput price PMIs had reached new record highs in November. A short-term modelconstructed by Bank staff of CPI inflation excluding energy, housing, educationand financial services, based on such survey indicators of price pressures,suggested some additional upside risks around the updated central projectionfor inflation over the next six months. The Bank's Agents had reported thatrising costs were increasingly and more frequently being passed through toprices, and that contacts expected further price increases next year driven inlarge part by pay and energy costs. CPI inflation was still expected to fallback in the second half of next year.

36) Since the MPC's previous meeting, households' one-year ahead inflation expectations had risen in the 2021 Q4 Bank/Kantarsurvey, but had remained unchanged in the December Citi/YouGov survey albeit ata higher level. Medium to longer-term household expectations in these surveyshad picked up over recent quarters. The Citi/YouGov five to ten-year aheadmeasure had remained above its historical average, while the Bank/Kantarfive-year ahead measure was still slightly below its historical average albeitthat there was a break in this series in early 2020 due to the shift fromface-to-face to online surveys. The mean response to questions on three-yearand four-year ahead inflation in the HM Treasury survey of professionalforecasters had increased significantly recently, but the median response wasstill consistent with the MPC meeting its 2% inflation target.

The immediate policy decision

37) The MPC sets monetary policy to meet the 2%inflation target, and in a way that helps to sustain growth and employment.

38) In the MPC's central projections in the November MonetaryPolicy Report, global and UK GDP had been expected to recover further from theeffects of Covid in the near term. UK consumption growth had been expected toslow over the forecast period, in part reflecting the drag on real incomes fromhigher energy prices. Conditioned on the rising path for Bank Rate expected byfinancial markets at that time, upward pressure on UK CPI inflation had beenexpected to dissipate over time, as supply disruption eased, global demandrebalanced from goods to services, and energy prices stopped rising. Earningsgrowth had also been expected to fall back from its current rate. As a result,inflation had been projected to fall back materially from the second half ofnext year. Conditioned on the rising market path for Bank Rate at that time,CPI inflation had been projected to be a little above the 2% target in twoyears' time and just below the target at the end of the forecast period.

39) Since the November MPC meeting, the Omicron Covidvariant had emerged. It appeared to be spreading rapidly within the UnitedKingdom and around the world. The new variant appeared to be much moretransmissible than the Delta variant and, on the basis of current knowledge,posed new risks to public health.

40) The Committee reviewed recent economicdevelopments, most of which pre-dated any possible impact from the emergenceand spread of the Omicron variant.

41) The level of global GDP in 2021 Q4 was likely tobe broadly in line with the November Report projection, but consumer price inflationin advanced economies had risen by more than expected. The Omicron variantposed downside risks to activity in early 2022, although the balance of itseffects on demand and supply, and hence on medium-term global inflationarypressures, was unclear. Global cost pressures had remained strong.Notwithstanding an apparent stabilisation in shipping prices, global supplychains had remained heavily disrupted. Companies had reported higher levels ofmaterial shortages in the United States and in the euro area.

42) Global risky asset prices had fallen in responseto the emergence of the Omicron variant, but had since largely recovered.Longer-term advanced-economy government bond yields had declined.

43) Market contacts were expecting Bank Rate to risein the coming months. In the days running up to the MPC's December meeting,most contacts had expected Bank Rate to remain at 0.1% at this meeting.Following the UK CPI release on 15 December, however, market pricing had becomemore finely balanced between Bank Rate remaining at 0.1% and an increase of 15basis points at this meeting.

44) As of 15 December 2021, the total stock of assetsheld in the Asset Purchase Facility had reached £893 billion, including £149billion of the £150 billion programme of UK government bond purchases announcedon 5 November 2020. Including the final gilt purchase auction that was beingconducted on 15 December, the programme was due to be completed by the time ofthe Committee's December policy announcement. The Committee had also beenbriefed by Bank staff on progress towards investing the cash flows associatedwith reductions in the stock of sterling non-financial investment-gradecorporate bond purchases held by the Asset Purchase Facility back into eligiblecorporate bonds, which had commenced in November 2021.

45) The number of Covid cases in the United Kingdomhad picked up in the days leading up to the MPC's December meeting and, uponthe identification of the Omicron variant, measures had been put in place inEngland and had been extended in the devolved nations. On 12 December, theCoronavirus alert level had been raised to level four, and the UK Governmenthad announced a plan for all those eligible in England to be offered a boostervaccine by the end of this year, while offering additional support to DevolvedAdministrations to accelerate their vaccination programmes.

46) Bank staff had revised down their expectations forthe level of UK GDP in 2021 Q4 by around ½% since the November Report, leavingGDP around 1½% below its pre-Covid level. Growth in many sectors had continuedto be restrained by disruption in supply chains and shortages of labour. Theimpact of the Omicron variant, associated additional measures introduced by theUK Government and Devolved Administrations, and voluntary social distancingwould push down on GDP in December and in 2022 Q1. The experience since March2020 suggested that successive waves of Covid appeared to have had less impacton GDP, although there was uncertainty around the extent to which that wouldprove to be the case on this occasion. There had already been some tentativesigns that UK economic activity had started to be affected by the emergence andspread of Omicron. As in previous Covid waves, headline GDP was still likely tobe affected significantly by the ways in which public-sector output wasmeasured in the UK national accounts.

47) The Labour Force Survey unemployment rate hadfallen to 4.2% in the three months to October, while the number of payrolledemployees had continued to rise strongly in November. There was little sign inthe available data that the closure of the Coronavirus Job Retention Scheme atthe end of September had led to a weakening in the labour market. The LFSunemployment rate was now expected to fall to around 4% in 2021 Q4, comparedwith the 4½% projection in the November Report. Abstracting from the risks fromthe impact of the Omicron variant, it was possible that the unemployment ratecould fall further over coming months if hiring continued to keep pace with thecurrent elevated levels of vacancies. Any weakness in demand related to the newvariant could offset those forces to some extent.

48) Bank staff continued to estimate that underlyingearnings growth had remained above pre-pandemic rates, and the Committeecontinued to see upside risks around the projection for pay in the NovemberReport. The REC permanent staff salaries index and job-to-job flows had bothincreased to record highs, and contacts of the Bank's Agents expected strengthin consumer price inflation to encourage workers to demand higher paysettlements.

49) Twelve-month CPI inflation had risen from 3.1% inSeptember to 5.1% in November, 0.6 percentage points higher than had beenexpected at the time of the November Report, and triggering the exchange ofopen letters between the Governor and the Chancellor of the Exchequer that wasbeing published alongside this monetary policy announcement. Core inflation hadalso risen to 4.0% in November. Relative to the November Report projection, therehad been significant upside news in core goods and, to a lesser extent,services price inflation.

50) Bank staff expected inflation to remain around 5%through the majority of the winter period, and to peak at around 6% in April2022, with that further increase accounted for predominantly by the laggedimpact on utility bills of developments in wholesale gas prices. Indicators ofcost and price pressures had remained at historically elevated levels recently,and contacts of the Bank's Agents expected further price increases next yeardriven in large part by pay and energy costs. CPI inflation was still expectedto fall back in the second half of next year.

51) Since the Committee's previous meeting,medium-term measures of UK financial market inflation compensation had remainedabove their average levels over the past decade. In part, that was likely toreflect market participants' somewhat higher central expectations forinflation. Measures of medium to longer-term household inflation expectationshad picked up over recent quarters, with the Citi/YouGov five to ten-year aheadmeasure remaining above its historical average, while the Bank/Kantar five-yearahead measure was still slightly below its historical average though there hadbeen a break in this series in early 2020. The median responses in surveys ofprofessional forecasters had remained consistent with CPI inflation being closeto target in the medium term. Overall, and as set out in Box C in the NovemberReport, the MPC judged that inflation expectations remained well anchored inthe United Kingdom at present. The Committee would, nevertheless, continue tomonitor very closely the risk that domestic and global demand and costpressures could affect medium-term inflation expectations, and so wage andprice setting.

52) In the run-up to its policy decision, theCommittee had been briefed by the Chief Medical Officer for England on recentCovid developments, including the risks to public health from the Omicronvariant.

53) The Committee discussed the possible implicationsof recent Covid developments for the economic outlook. The MPC had notedpreviously the risks to the economy from a drop in vaccine effectivenessarising from viral mutations, although it was unclear currently to what extentthe Omicron variant would lead to a decline in vaccine protection againstsevere disease. Given the clear signs of increased transmissibility for the newvariant, there was the potential for a very high number of infections over avery short period.

54) It was important to note that the current positionof the global and UK economies was materially different compared with prior tothe onset of the pandemic, including the elevated levels of consumer priceinflation. Global inflationary pressures had been influenced significantly bythe shift in spending from services to durable goods that the pandemic hadinduced. In the MPC's November Report forecast, it had been assumed that arebalancing of demand would lead to a gradual reduction in the inflation rate,and in some cases the level, of the prices of traded goods. The possibility ofrenewed social distancing meant that this rebalancing was now more likely to bedelayed and so global price pressures might persist for longer, although therewere limits to how much further households' stocks of durables were likely torise and the responses of fiscal policy globally to the new variant wasuncertain. A potential worsening of global supply chain disruption could alsopush up on inflationary pressures. For example, China's current zero-Covidstrategy could lead to renewed disruptions at Chinese factories and ports, andcould affect shipping costs. Against that, aggregate demand could slow,reducing inflationary pressures, particularly for some consumer-facingservices, and any change in expectations of future demand might lead to someloosening of labour market conditions. Demand conditions could neverthelessremain strong if households deployed savings that had been built up during thecourse of the pandemic to a greater extent than had been assumed in theNovember Report. Overall, the balance of these effects on inflation wasunclear.

55) So far, successive waves of Covid had tended tohave less impact on GDP and consumer spending than previous waves, but therewas uncertainty around the extent to which that would prove to be the case onthis occasion. Progressively more limited reductions in mobility and socialinteractions might have reflected the successful roll-out of vaccines and theprotection that these offered against the Delta variant. The emergence of anew, partially vaccine-resistant Covid variant might therefore have asignificant negative impact on consumer confidence and on economic behaviour.There could, however, also be limits to the extent to which households wouldadjust their behaviour further. For example, a large number of employees hadcontinued to work from home prior to the recent change in government guidance,growth in consumer spending on restaurants had continued to be supported bysales of take-away and delivery food in addition to seated dining, and onlineretail sales had remained strong. More generally, spending less on one categoryof consumption did not necessarily mean a like-for-like reduction in totalspending. Such aggregate consumption decisions should be more closely relatedto household expectations of future income, including expectations beyond thepoint at which the pandemic was likely to be at its immediate peak.

56) The outlook for UK activity, and the balance ofthe effects of the Omicron variant on demand and supply, would also depend onthe responses of other policymakers in the United Kingdom and abroad.

57) The Committee turned to its immediate policydecision.

58) The MPC's remit was clear that the inflationtarget applies at all times, reflecting the primacy of price stability in theUK monetary policy framework. The framework also recognised that there will beoccasions when inflation would depart from the target as a result of shocks anddisturbances. In the recent unprecedented circumstances, the economy had beensubject to very large and repeated shocks. Given the lag between changes inmonetary policy and their effects on inflation, the Committee, in judging theappropriate policy stance, would as always focus on the medium-term prospectsfor inflation, including medium-term inflation expectations, rather thanfactors that were likely to be transient.

59) At its November meeting, the Committee had judgedthat, provided the incoming data, particularly on the labour market, werebroadly in line with the central projections in the November Monetary PolicyReport, it would be necessary over coming months to increase Bank Rate in orderto return CPI inflation sustainably to the 2% target. Recent economicdevelopments suggested that these conditions had been met. The labour marketwas tight and had continued to tighten, and there were some signs of greaterpersistence in domestic cost and price pressures. Although the Omicron variantwas likely to weigh on near-term activity, its impact on medium-terminflationary pressures was unclear at this stage.

60) At this meeting, most members of the Committeejudged that an immediate, small increase in Bank Rate was warranted. Althoughthe conditions for tightening set out in November had been met, the decision atthis meeting was finely balanced because of the uncertainty around Coviddevelopments. There was some value in waiting for further information on thedegree to which Omicron was likely to escape the protection of current vaccinesand on the initial economic effects of this new wave. There was, however, alsoa strong case for tightening monetary policy now, given the strength of currentunderlying inflationary pressures and in order to maintain price stability inthe medium term. The economic impact of the new variant could, in somescenarios, increase these inflationary pressures further. Moreover, maintainingthe current monetary policy stance when CPI inflation was materially above the2% target and the output gap appeared to be closed might cause medium-terminflation expectations to drift up further.

61) One member of the Committee judged that, were itnot for the emergence of the Omicron variant, an increase in Bank Rate couldhave been appropriate at this meeting. However, the significant uncertaintyintroduced by Omicron warranted waiting until February for more clarity beforeconsidering any change in Bank Rate. UK output remained below its 2019 Q4 leveland further below the trend for potential. The new variant and renewedvoluntary social distancing would unambiguously slow economic activity, butwould have two-sided effects on inflation. The overall effect of Omicron on theshort-term trade-off between inflation and output, and on the medium-termprospects for inflation, would depend critically on the transmissibility,vaccine resistance and severity of the variant, but also on the overall policyresponse, both domestically and abroad. Some scenarios would call for tightermonetary policy, while others would require a somewhat longer period ofaccommodation. In line with risk management concerns owing to the asymmetry ofavailable monetary policy tools, this member preferred to wait for furtherevidence that the recovery remained entrenched, and was not threatenedmaterially by the new variant, before tightening monetary policy.

62) The MPC would review developments, includingemerging evidence on the implications for the economy of the Omicron variant,as part of its forthcoming forecast round ahead of the February 2022 MonetaryPolicy Report. The Committee would, as always, continue to focus on themedium-term prospects for inflation. The Committee continued to judge thatthere were two-sided risks around the inflation outlook in the medium term, butthat some modest tightening of monetary policy over the forecast period waslikely to be necessary to meet the 2% inflation target sustainably. TheCommittee would reach its assessment on the balance of the risks to medium-terminflation in light of the relevant data as they emerged.

63) The Chair invited the Committee to vote on thepropositions that:

Bank Rate should be increased by 0.15 percentagepoints, to 0.25%;

The Bank of England should maintain the stock ofsterling non-financial investment-grade corporate bond purchases, financed bythe issuance of central bank reserves, at £20 billion;

The Bank of England should maintain the stock of UKgovernment bond purchases, financed by the issuance of central bank reserves, at£875 billion.

Eight members (Andrew Bailey, Ben Broadbent, JonCunliffe, Jonathan Haskel, Catherine L Mann, Huw Pill, Dave Ramsden and MichaelSaunders) voted in favour of the first proposition. Silvana Tenreyro votedagainst this proposition, preferring to maintain Bank Rate at 0.1%.

The Committee voted unanimously in favour of thesecond and third propositions.

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