Use the Minutes of the Monetary Policy Committee (MPC) shown below to word a single essay explaining the Bank of England's policy decision in February 2022 to increase Bank Rate by 0.25 percentage points to 0.5%, and to begin to reduce its quantitative easing (referred to in the Minutes as UK government bond purchases and investment-grade corporate bond purchases).

Minutes of the Monetary Policy Committee Meeting ending on 2 February 2022

2 UK-weighted global GDP was estimated to have grown by 0.8% in 2021 Q4, as had been expected in the November Monetary Policy Report. In 2022 Q1, global GDP was expected to grow more slowly than had been anticipated in the November Report, as the Omicron Covid variant had led to renewed restrictions and voluntary social distancing in many countries. However, the uncertainty relating to the economic impact of Omicron had declined, and its economic consequences were likely to be more limited and of shorter duration than had been anticipated at the time of the MPC's December meeting. Global cost pressures, arising from the strength in goods demand and supply chain disruptions as well as high energy prices, had remained elevated and had also weighed on activity over past months. Strong demand for goods, in particular in the United States, had appeared to have been a more important determinant of global bottlenecks than supply chain disruptions over recent months.

16 GDP was estimated to have risen by 0.9% in November, stronger than had been expected by Bank staff. Combined with the upward revisions to GDP, this meant that, prior to the onset of the Omicron variant, aggregate activity had regained its pre-pandemic level for the first time. GDP had been almost 1% higher than expected at the time of the November Monetary Policy Report. Within the November output data, activity had been stronger than expected across most sectors of the economy, including consumer-facing, transport and professional services. There had also been tentative signs in the manufacturing and construction sectors that supply disruptions were starting to ease, although monthly data could be volatile.

20 Although the number of companies reporting skilled labour shortages as a constraint on output in the January CBI Industrial Trends survey had remained very elevated, the number of companies reporting materials shortages as a factor limiting production had fallen back somewhat from its highest level since the mid-1970s, and the January manufacturing PMIs had suggested that supply constraints were not worsening as much as in previous months. Contacts of the Bank's Agents expected only a slow improvement in supply chain disruption through 2022, and some continued to judge that problems could persist into 2023. There had also been increasing reports of slower investment growth due to shortages of goods, machinery and labour. There had, nevertheless, been widespread strength in investment intentions reported to the Agents, with contacts highlighting the reinstatement of projects that had been paused during the pandemic, and the need to increase capacity to meet demand.

21 The Labour Force Survey (LFS) unemployment rate had fallen to 4.1% in the three months to November, 0.4 percentage points lower than had been expected at the time of the November Monetary Policy Report. The LFS employment rate had been broadly as expected, however, as inactivity had unexpectedly risen slightly. The number of inactive people who reported wanting a job had continued to fall. Her Majesty's Revenue and Customs (HMRC) employee payrolls had risen by a further 184,000 in the single month of December, although these initial estimates had tended to be revised down somewhat. Bank staff judged that both the LFS employee and HMRC payroll series were around their 2019 Q4 levels after accounting for an unusually high number of individuals having switched from self-employment and onto payrolls, associated in part with tax reforms. Self-employment had remained weak even accounting for these estimates of switching, such that LFS employment was 1.4% below its 2019 Q4 level in the three months to November. Indicators of labour market tightness had nevertheless remained elevated. The ratio of vacancies to unemployment had increased to another record high since a consistent series had begun in 2001.

22 Bank staff expected the LFS unemployment rate to fall further to 3.8% in 2022 Q1, despite the spread of Omicron weighing on activity at the beginning of the quarter. The flash composite employment PMI for January had been broadly unchanged on the month, remaining well above its past historical average. The Bank's Agents had reported a modest easing in employment growth, in part due to recruitment difficulties having remained intense. High-frequency indicators of online vacancies had dipped during December and had begun to recover in January, but that profile had been comparable to the seasonal pattern prior to the pandemic. Instead of weaker labour demand, the main counterpart in the labour market to Covid-related weakness in activity had appeared to be an increase in staff absences due to sickness, self-isolation or caring responsibilities. The ONS Business Insights and Conditions Survey suggested that around 3% of the workforce had been absent for Covid-related reasons around the turn of the year. The Agents' contacts had begun to see a reduction in absences, however, and generally viewed Omicron as a temporary issue.

23 Growth in private-sector regular Average Weekly Earnings (AWE) had slowed to 4.1% in the three months to November on a year earlier, broadly in line with Bank staff expectations ahead of the release. Pay growth had been boosted by the mechanical effects of the Coronavirus Job Retention Scheme and changes in the composition of the workforce, but those effects had waned in recent months. Adjusting for these effects, Bank staff estimated that underlying private-sector regular pay growth had remained at around 4 to 4%, above pre-pandemic rates of around 3 to 3%. The median of pay growth based on HMRC payrolls data was around 3%, comparable to pre-pandemic rates, implying that recent pay awards had been more skewed towards the upside than in the recent past. That was broadly consistent with the Bank's Agents' contacts reporting that pay increases had been significantly higher for workers with skills in short supply.

24 In the February Report projection, underlying private-sector pay growth was expected to pick up further in coming quarters. A special survey of firms conducted by the Bank's Agents suggested that the average pay settlement was expected to rise to close to 5% in 2022, with the pickup broadly based across different sectors of the economy and firms of different sizes. Contacts had cited the ability to retain staff and recruit new workers, and increases in consumer price inflation, as factors that had pushed up their expectations for pay. The REC permanent staff salaries index, which measured the monthly pay growth of new permanent hires, had also remained close to record highs in December.

25 Twelve-month CPI inflation had risen to 5.4% in December, almost 1 percentage point above the November Report forecast. The upside news had been spread across a number of components, particularly within core goods. Strength in core goods prices, alongside higher energy prices, had also accounted for much of the absolute overshoot in inflation relative to the 2% target. Services price inflation had moved further above its pre-Covid rate. Price increases had been particularly acute for second-hand cars and hospitality, replicating trends in the United States.

26 CPI inflation was projected to increase further in coming months, to close to 6% in February and March and peaking at around 7% in April when higher utility price caps were due to be implemented. This projected peak was around 2 percentage points higher than had been expected in the November Report. In addition to the upside news in the CPI data to December, wholesale gas and electricity futures prices had increased further, putting upward pressure on utility prices. The costs of the Supplier of Last Resort mechanism, covering the losses that energy companies had incurred from taking on customers from failed suppliers, were also expected to begin to be passed on to household energy bills. The annual ONS update of the CPI weights was anticipated by Bank staff to lead to an increase in CPI inflation in the near term, in part due to greater weight being placed on energy prices. Certain contract prices, such as for telecommunication services, that were indexed to consumer price measures were also due to increase in coming months.

28 Measures of households' and companies' short-term inflation expectations had risen further since the MPC's previous meeting. The Citi/YouGov household measure of expectations for the year ahead had increased from 4.0% in December to 4.8% in January, although the five-to-ten-year ahead measure was unchanged. Respondents to the Decision Maker Panel had increased their expectations for their own price increases over the next twelve months from 4.2% in the survey covering the three months to November to 4.5% for the three months to January. Professional forecasters continued to expect CPI inflation to be close to the 2% target two and three years ahead.

34 Having reached a very high level around the turn of the year, the number of Covid cases had fallen back in the United Kingdom, and had then appeared to have stabilised. In the run-up to this MPC meeting, the UK Government and Devolved Administrations had announced a number of relaxations to Covid measures, some of which had been put in place in response to the Omicron variant. The MPC's projections were conditioned on the assumptions that no material restrictions on economic activity were re-imposed, and that there was no further widespread voluntary social distancing, following this wave.

38 Consumption growth was expected to slow, as households cut back on spending in the face of the material adverse effects on their real incomes from the sharp rises in global energy and tradable goods prices, and the planned increase in national insurance contributions in April 2022. Although consumption growth therefore slowed materially over the first two years of the forecast period, it remained above income growth. That reflected an assumption that households would spend some of the significant additional savings that they had accumulated, in aggregate, during the pandemic. As a result, the household saving rate was expected to fall from 8.3% in 2021 Q3 to below 4% from the end of 2022. There were risks in both directions around this projection. Given the windfall nature of the excess savings built up during the course of the pandemic, households could be more willing to spend out of these to support their level of real consumption. Set against that, existing savings were more concentrated among higher earners, who might generally spend proportionately little out of their savings. Developments in energy prices in particular could also disproportionately affect those households with lower savings.

53 Five members judged that a 0.25 percentage point increase in Bank Rate was warranted at this meeting. The February Report projections implied that some tightening in monetary policy was required to bring inflation back to the 2% target sustainably in the medium term. However, the forecast also incorporated a material trade-off related to the continuing global energy and tradable goods price shock, with CPI inflation expected to remain materially above the target in the first half of the forecast, at the same time as a margin of spare capacity was opening up. After the second year, conditioned on the market path for Bank Rate, CPI inflation was projected to fall below the target due to that widening margin of spare capacity. In the scenario in which energy prices followed their forward curves throughout the forecast period, inflation was projected to undershoot the target by percentage point in two and three years' time. These members recognised the risks from the possibility of stronger domestic wage and price pressures in the near term, but also saw a need to balance this against the potential for inflation to fall more quickly and to a greater extent than expected if energy and other tradable goods prices followed a lower path than in the MPC's central projection. There was also a case for moving Bank Rate in small increments; a larger increase at this meeting could have an outsized impact on expectations for the further path of policy, which was already sufficient, in the central projection, to push inflation well below the target in year three of the forecast.

54 Four members judged that a 0.5 percentage point increase in Bank Rate was warranted at this meeting. Monetary policy had been very accommodative, and capacity pressures were now widespread, especially in the labour market. The projected path for CPI inflation was again being revised up over the first two years of the forecast period, while medium-term inflation expectations remained relatively high and on some measures had increased further. Companies responding to the Decision Maker Panel had indicated that they expected to raise prices significantly in 2022. The strong pickup in pay settlements reported to the Bank's Agents, and the recent broadening from goods price to services price inflation, suggested that these developments were now being reflected in domestic costs and prices, which could make CPI inflation more persistent than was expected in the February Report central projection. Monetary policy should tighten to a greater extent at this meeting in order to reduce the risk that recent trends in pay growth and inflation expectations became more firmly embedded and thereby help to bring inflation back to the target sustainably in the medium term.

60 The Chair invited the Committee to vote on the propositions that:

Bank Rate should be increased by 0.25 percentage points, to 0.5%;

The Bank of England should begin to reduce the stock of UK government bond purchases, financed by the issuance of central bank reserves, by ceasing to reinvest maturing assets;

The Bank of England should begin to reduce the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, by ceasing to reinvest maturing assets and by a programme of asset sales to be completed no earlier than towards the end of 2023 that should unwind fully the stock of corporate bond purchases.

Five members [...] voted in favour of the first proposition. Four members [...] voted against this proposition, preferring to increase Bank Rate by 0.5 percentage points, to 0.75%.

The Committee voted unanimously in favour of the second and third propositions.