Bank of England December Rate decision: 5-4 for a cut from 4% to 3.75%

 Some points. 

1. Self on the Today programme, Radio 4 

The interview starts at 1:20:11 :

https://www.bbc.co.uk/sounds/play/m002nhxx

2. A feature of the BoE minutes that caught my eye:

In 5th November, they said "The MPC sets monetary policy to meet the 2% inflation target,"

Today they said 

"19.

The Monetary Policy Committee’s job is to ensure that CPI inflation falls all the way back to the 2% target and stays there."

This is an interesting addition I think, trying to signal to the market that drifting along at above 2% is not what they want to do.

Labour markets updated and the UV curve

 The Resolution Foundation has a good update to the labour market situation today. 

Some fasctinating trends.

1.  Unemployment is rising.  

Inactivity is up due to more long-term sickness.  But it is more or less equally down as more come into the labour market.  Unemployment is up.

2. Whether future unemployment rises or falls depends if the natural rate has changed.  They say little evidence based on the Beveridge and Wage Phillips curve: 

3. I note the RF have reservations about the minimum wage, especially for young workers, calling for them to keep the youth rate.  As they say (March 25) increases in NICs are absorbed by wages except if there is a minimum wage floor

"The combined impact of NICs and the minimum wage is significant: the overall increase in labour costs for employing a part-time adult minimum wage earner in April will be 14.2 per cent, the largest since the minimum wage began, in 1999.

Most workers will end up absorbing much of the higher NICs in the form of lower pay. But pay cannot fall for workers at or near the minimum wage, so labour cost increases and job losses will be concentrated at the bottom of the labour market"

My comments.  

1. Their point, which has some force is that the current situation on the UV curve doesnt show a shift out of hte curve i.e. the dot on the left is about in line with the past.  We shall see: the labour market data today showed vacancies about flat and unemployment rising, so the dot might be moving out horizontally to the right which would be a rise in U* (the natural unemployment rate).

2. the curve on the left seems to show that wage growth is higher than what unemployment can explain, altough the RF point out is has been moving closer to the historic line.  I was certainly worried about this upward wage inflation when I was on the MPC and this movement closer to the line is welcome. But it is not there yet and with headline inflation rising in recent months, there might be some additional element of catch up wage pressure coming in the pipeline.  

3. I note too the rises in the youth minimum wage in the Budget that will be a source of upward U* pressure, as part of the stronger rise in the minimum wage in the UK than in other countries.

Big numbers and thinking about GDP

 UK GDP is about £2.2 trillion. A basis point is defined as: 1bp is 0.0001 = 1/100th of 1%.  

1. So a basis point of GDP, 0.01% of GDP, is 2,200*10^9 * 1*10^-4=£220m.  That's about half the cost of a medium size hospital.

2. Ten basis points, 0.1% of GDP is therefore £2.2billion. 

3. with around 30m households GDP is around £70,000 per household, so 0.1% of GDP is around £70 per household. 

My time on the MPC and monetary policy at Covid and after

I was asked by the IIMR to talk about my time on the MPC and how I reacted to the pandemic and subsequent inflation.  The video (18 mins) is here.  

The blurb says: 

Gain an insight into the thinking behind the Monetary Policy Committee decisions during the Covid crisis from the personal reflections of Jonathan Haskel, who was an external member at the time. From the second session of the 2025 IIMR Monetary Conference 'Why were so many economists wrong about inflation in the early 2020s?' that was held at the University of Buckingham on November 12th, 2025.

The UK social security system: who "puts in" and who "gets out"?

 https://ifs.org.uk/news/more-nine-ten-individuals-pay-more-taxes-they-receive-social-security-over-their-lifetime?utm_source=chatgpt.com

I am late to this IFS report "Redistribution from a Lifetime Perspective,

"

In a single year, 64% of individuals in the UK pay more in taxes than they receive in social security. New analysis, ...shows that extending the period of analysis from a single year to an entire lifetime increases the percentage who pay more in taxes than they receive in social security to 93%."

and they say

The Labour government’s expansion of in- and out-of-work benefits between 1999 and 2002 was less well targeted towards the lifetime poor than the snapshot poor. The reason is that many of the poorest individuals over the lifetime are not poor in all periods of life.

 

UK minimum wages over time, comparison with other countries

 

1. This is an important chart from the resolution foundation, labour market outlook, Q2 2024.

Investment and uncertainty

 Uncertainty holds back business investment: see Brexit for example.  The November Bank of England Monetary Policy Report, p.20, shows this chart: 

and says

"Measures of business confidence have recovered a little over recent months but many remain

weak, and contacts of the Bank’s Agents note that investment intentions are subdued (ASBC

– November 2025 and Chart 1.8). Contacts report that weak demand and elevated

uncertainty, including ahead of the Autumn Budget, may be causing firms to delay investment.

Consistent with that, the proportion of respondents to recent DMP Surveys reporting that the

overall level of uncertainty facing their businesses is high or very high has been around its

highest level since end-2022."

What has happened to NHS capital per worker?

 1. a New report "From Diagnosis to Delivery" by Allas et al has, on p.45 some information.

2. The figure is a figure relative to other countries. I don't put much store by that, what matters is how productive we are with the capital not how much we are spending.

3. The figure below says NHS capital per worker has fallen by 36% in real terms since 2010. i think this is a capital stock per worker figure.

4. The ONS data tell a different story.  That is capital services per worker.  If you go to 

https://www.ons.gov.uk/economy/economicoutputandproductivity/publicservicesproductivity/datasets/publicserviceproductivityestimateshealthcareengland

you can download the 1996-2023 data

from which you get that since 1996 capital has grown 7.6% faster than labour, but from 2010, -20%.  So more capital per worker over the whole period. 

The locus of R&D is moving to the information and software industries

 From the technical appendix to Draghi report, p.234.

Tariff engineering

 Fascinating work by Flannen et al, here. Who Pays for Tariffs Along the Supply Chain? Evidence from European Wine Tariffs? 

"We exploit additional detailed product-level alcohol label data for all wines sold in the U.S. to document how changes in product composition reflect an intriguing case of tariff engineering.

 Because the initial tariffs only applied to wines defined by a threshold level of alcohol content (≤ 14% ABV), we document a systematic shift in new product offerings toward higher alcohol content exempt from these tariffs, as well as engineering of existing wines to modify the listed alcohol content for exemption from these tariffs"

They show an example of how wine was relabelled

 And make the comment:

Given the speed with which we observe the tariff-engineering behavior documented in Figure 5 above, it seems unlikely that the wines changing threshold levels to avoid the higher tariff involved actual changes in alcohol content. Rather, these adjustments likely reflected changes in what was reported on wine labels. Using testing data from the Liquor Control Board of Ontario for 1992-2009, Alston, Fuller, Lapsley, Soleas and Tumber (2015) document that alcohol content was underreported on average, and that, conditional on underreporting, the true alcohol content was understated by 0.42 percentage points

A fascinating example of adjustment by non-price dimensions.