BoE DMP Survey: UK firms anticipate easing inflation, improved employment outlook

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The Bank of England (BoE) released the results of its February Decision Maker Panel (DMP) survey on Thursday, based on responses from 2,042 Chief Financial Officers of UK firms collected between February 6 and February 20.

UK firms report annual own-price growth of 3.7% in the three months to February.
Businesses expect a slight moderation in both price inflation and wage growth over the next year.
Employment expectations improve modestly after several months of contraction.

Firms reported that their realized annual own-price growth was 3.7% in the three months to February, unchanged compared with the previous three-month period. This measure reflects the prices charged by firms across the entire economy, not just those selling directly to consumers.

Looking ahead, year-ahead expectations for firms’ own-price inflation edged slightly lower to 3.4% in the three months to February, down 0.1 percentage points from the previous survey. According to the BoE, this suggests businesses anticipate a modest easing in output price inflation over the coming year.

Expectations for consumer price inflation also declined marginally. Firms now expect Consumer Price Index (CPI) inflation to reach 3.1% over the next twelve months, compared with 3.2% previously. Meanwhile, three-year-ahead CPI inflation expectations slipped to 2.8%, indicating that businesses still anticipate inflation gradually moving closer to the central bank’s target over the medium term.

On the labor market side, firms reported annual wage growth of 4.3% in the three months to February, slightly lower than the 4.4% recorded previously. Year-ahead wage growth expectations remained unchanged at 3.6%, implying that companies expect wage growth to slow by around 0.7 percentage points over the next twelve months.

Finally, the survey points to a modest improvement in employment dynamics. Firms reported a decline in realized annual employment growth of 0.2% in the three months to February, an improvement from the 0.5% dip in the previous period. Expectations for employment growth over the next year also increased slightly, rising by 0.3 percentage points to 0.1%.

Market reaction

In the foreign exchange market, the GBP/USD pair trades around 1.3350 at the time of writing on Thursday, down 0.18% on the day.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

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).

How does the Bank of England’s monetary policy influence Sterling?

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.

What is Quantitative Easing (QE) and how does it affect the Pound?

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.

What is Quantitative tightening (QT) and how does it affect the 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.