As this year commences, high inflation and weak economic growth continue to shape global conditions. Russia’s war in the Ukraine drags on and recession risks remain elevated in the Euro Area, even though energy constraints have eased. Growth prospects for the United States this year are lower. The growth outlook for China has improved but is likely to remain modest by historical standards.  In the developing world, a number of economies face debt distress, exacerbated by tighter global financial conditions.

Last year, higher than expected headline inflation and rising core inflation led major central banks to accelerate the normalisation of policy rates.  With advanced economy interest rates likely to increase in the near term, we expect financial asset prices globally to remain volatile. 

While core inflation in December came out significantly better than expected, increases in electricity and food price inflation and higher headline inflation for 2022 as a whole keep the headline inflation forecast elevated in the near and medium-term.

Inflation expectations increased strongly over the past year.  Average expectations of future inflation surveyed in the fourth quarter of 2022 increased to 6.1% for 2023 and 5.6% for 2024.  Expectations for inflation in 2023 based on market surveys sit at 5.5%.15  Long-term inflation expectations derived from the 5-year break-even rates in the bond market have moderated to about 5.0%.  

In the second quarter of 2022, headline inflation breached the upper end of the target range, and is forecast to remain above it until the second quarter of this year.  Headline inflation is only expected to sustainably revert to the mid-point of the target range by the fourth quarter of 2024. The forecast takes into account the policy rate trajectory indicated by the Bank’s Quarterly Projection Model (QPM).  As usual, the repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks.  

Against this backdrop, the MPC decided to increase the repurchase rate by 25 basis points to 7.25% per year, with effect from the 27th of January 2023.