The Bank's updated Quarterly Inflation Report (QIR) acknowledges that the UK real economy has not, at least so far, been impacted as badly as originally feared by the Brexit vote. Moreover, it also makes a significant upward adjustment to the forecast inflation profile that will have financial markets contemplating just how far prices can accelerate before the MPC has to start tightening.
As a starting point, real GDP growth last quarter has been revised up from the 0.1 percent forecast made in August to 0.4 percent (implying a 0.1 percentage point downward revision to the current official estimate). The economy is now seen expanding 2.2 percent in calendar 2016, 1.4 percent in 2017 and 1.5 percent in 2018 versus 2.0 percent, 0.8 percent and 1.8 percent respectively last time. Inflation is expected to climb from an average 1.25 percent this quarter to a peak of some 2.83 percent in the second quarter of 2018, a full 0.8 percentage points above its target. It then eases to (a still above target) 2.49 percent by the end of 2019.
However, as the Bank points out, its response to rising prices has to be in part determined by where the pressure is being generated. To this end, the new forecasts for average earnings growth are not very different from the August QIR, - indeed 2017 sees a cut from 3.0 percent to 2.75 percent so domestic factors are not the major worry here. This suggests that any tightening of policy would probably be unjustified and unnecessarily hurt the economic recovery.
In line with the previous issue, the November QIR outlook is surrounded by high levels of uncertainty. Indeed, the new High Court ruling on the Brexit vote can only add to the increasingly tentative nature of any UK economic projection. Accordingly, these updated forecasts should be viewed with even more caution than usual.
The Quarterly Inflation Report (QIR) is produced by the Bank of England (BoE) every February, May, August and November. The publication updates the central bank's assessment of recent economic developments at home and abroad and sets out the latest official forecasts for growth and inflation. As such, it provides the economic underpinnings for any change in monetary policy made by the Bank's Monetary Policy Committee (MPC). Details of the QIR are released at the same time as the BoE makes its policy announcement.
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.
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