GB: BoE Inflation Report

February 2, 2017 06:00 CST

Expectations that a surprisingly robust real economy and faster than expected pick-up in inflation would force the BoE to amend its November Quarterly Inflation Report (QIR) forecasts proved only partially accurate.

On the growth front, the Bank has indeed acknowledged a string of strong data by revising up its 2017 projection from 1.4 percent to 2.0 percent and next year's forecast from 1.5 percent to 1.6 percent. The 2019 call has similarly been nudged a tick firmer to 1.6 percent.

However, the inflation outlook is little different from the November QIR. Indeed, the rate has been shaded to 2.72 percent in the first quarter of 2018, down from 2.81 percent last time, and to 2.56 percent a year later, down from 2.65 percent. By the first quarter of 2020 inflation is seen running at 2.36 percent and so remains above target but is at least heading in the right direction. The downward adjustments reflect both the pound's recent appreciation and a more sanguine view of the labour market.

Hence, unemployment is now forecast to increase from 4.8 percent last quarter to just 5.0 percent in a year's time and then drift back down to 4.8 percent again by 2020. This is comfortably below the November profile which saw the rate at 5.6 percent from the start of 2018. However, and crucially, the Bank has revised down its estimate of the equilibrium level of joblessness from 5.0 percent to 4.5 percent, implying a significant increase in economic slack.

As such, today's updated economic projections can be used by the MPC as justification for no change in monetary policy. In fact, if broadly accurate, the new forecasts potentially point to a steady stance throughout 2017.

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.