GB: BoE Inflation Report

Wed May 13 04:30:00 CDT 2015

The BoE's new Quarterly Inflation Report (QIR) will boost speculation that Bank Rate will not be hiked in 2015.

On the basis of market prices, CPI inflation is forecast to be 2.0 percent in two years' time, exactly in line with its medium-term target. Risks to the forecast are seen as evenly balanced. Financial markets currently discount Bank Rate rising from 0.5 percent to 0.6 percent in the first quarter of next year followed by further small increases to 0.7 percent in the second quarter and 0.8 percent in the July-September period.

However, what is an essentially unchanged inflation projection from February masks a significant downward revision to growth expectations. These now see the economy expanding 2.5 percent in 2015, some 0.4 percentage points below the projection last time. Expansion rates in 2016 and 2017 have similarly been slightly lowered. Significantly too, the forecast for earnings growth has also been cut and the annual fourth quarter rate now stands at only 2.5 percent, a full one percentage point down on the February call. Thereafter the rate climbs to 4 percent by end-2016 where it remains for the rest of the forecast horizon.

Somewhat surprisingly, one aspect of the forecast assumptions that has not been revised is the long-term unemployment rate. Despite a major study into labour supply, the equilibrium rate is still estimated at 5.0 percent and joblessness is not seen falling below this level until late 2017. Spare capacity is currently put at 0.5 percent of GDP.

As usual the new forecast is surrounded by high levels of uncertainty, not least surrounding the outlook for the oil market and exchange rate. Still, as its stands it looks highly likely that Bank Rate will still be at 0.5 percent in December.

The Bank's quarterly Inflation Report was first published in 1993. The Report sets out the detailed economic analysis and inflation projections on which the Bank's Monetary Policy Committee bases its interest rate and other major policy decisions, and presents an assessment of the prospects for UK inflation.

For analysts who want to know the Monetary Policy Committee's latest thinking on the economy, the Inflation Report is must reading. The Report starts with an overview of economic developments; this is followed by five sections which include analysis of money and asset prices; analysis of demand; analysis of output and supply; analysis of costs and prices and assessment of the medium-term inflation prospects and risks. The Bank of England's governor holds a press conference to discuss the report.