GB: BoE Inflation Report

Thu Nov 02 07:00:00 CDT 2017

The BoE's new Quarterly Inflation Report (QIR) makes only slight changes to the forecasts contained in the August edition and, as such, provides only limited justification for today's monetary tightening.

Inflation is still projected to be above its 2 percent target level over the entire forecast horizon. After peaking at 3.2 percent in October, annual CPI growth is seen slowing to 2.37 percent by the end of next year, 2.21 percent at end-2019 and 2.15 percent at end-2020. Average earnings growth is seen climbing from 2.25 percent in the fourth quarter of this year to 3.25 percent by the end of 2019. These forecasts, which are broadly in line with the August projections, assume a very gradual increase in Bank Rate to only 1 percent in three years' time.

On the same assumption, real GDP growth is put at 1.5 percent at the end of this year and 1.7 percent in both 2018 and 2019. One point to note here is that the BoE seems to have become more cautious about the economy's ability to accommodate a surprise increase in demand. This is consistent with Governor Carney's recent remarks to the effect that weak investment growth since the Brexit vote has damaged UK productive potential. If so, interest rates would have to climb faster to keep inflation on track should demand outpace official expectations.

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.