BoE DMP Survey: UK companies’ inflation expectations cool in March


 The latest Bank of England (BoE) Decision Maker Panel (DMP) survey for February showed on Thursday that UK companies expect their selling prices and wage inflation to cool down over the next year.

Key takeaways

Selling price expectations dipped to 4.1% from 4.3%, the lowest reading since October 2021.

Wage growth expectations for the coming 12 months fell to 4.9% on a three-month moving average basis from 5.2% in February, marking the lowest reading since June 2022.

The survey is one of the most closely watched by members of the BoE's Monetary Policy Committee (MPC).

Market reaction

The Pound Sterling is unfazed by the UK businesses’ falling inflation expectations, as GBP/USD adds 0.08% on the day to trade at 1.2658, as of writing.

BoE FAQs

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

 

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