Bank of England Quarterly Inflation Report
February 12, 2015
British CPI inflation fell to 0.5% in December and has been below the Bank of England’s medium-term target since January 2014. One needs to go back to 2000 to find an inflation rate as low as now, and the latest quarterly Inflation Report released today by the Bank of England opines that sub-zero inflation could be seen over some coming months but also emphasizes that longer-term dynamics of strengthening real income growth, robust domestic demand and diminishing slack in the economy should return inflation to target within two years. In 2017, inflation should average marginally above the 2.0% target. The latest thinking of officials is summarized below and seems consistent with a first interest rate hike coming in 2016.
The fall in oil prices, together with monetary policy measures taken abroad, should support global demand. Lower energy prices will also boost UK real income growth. That, along with a lower expected path for Bank Rate than in November, should help to sustain the recent robust expansion in UK domestic demand. As slack is absorbed, inflation is projected to rise back to levels consistent with the inflation target. The Committee judges that it is currently appropriate to set policy so that it is likely that inflation will return to the 2% target within two years. The MPC noted that conditional on interest rates following the path currently implied by market yields, it was likely that slack in the economy would be absorbed and inflation would return to the 2% target within two years…..
There are risks to the inflation outlook in both directions. Reductions in Bank Rate are less likely to have undesirable effects on the supply of credit to the UK economy than previously judged by the MPC. Were upside risks to materialize, it would be appropriate for Bank Rate to increase more quickly than embodied in current market yields but the likelihood is that those increases would still be more gradual and limited than in previous tightening cycles.
The MPC stands ready to take whatever action is needed, as events unfold, to ensure inflation remains likely to return to target in a timely fashion. Under the central case, the MPC judges it more likely than not that Bank Rate will increase over the forecast period.
Copyright 2015, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of England
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