GB: BoE Inflation Report

Thu Feb 08 06:00:00 CST 2018

The BoE's new Quarterly Inflation Report (QIR) shows a slightly more optimistic view of the economic outlook but in the main, adjustments to the November edition are only relatively minor.

Using market interest rate expectations, last time the QIR saw annual CPI inflation peaking at just under 3.0 percent this quarter. A gradually declining profile thereafter put inflation at 2.15 percent at the end of 2020. The new forecast similarly has inflation above the 2 percent target throughout the forecast horizon, posting 2.28 percent in the first quarter of 2019, before slowly decelerating to 2.16 percent a year later and 2.11 percent a year after that. At the same time, near-term economic growth has been nudged marginally higher in respect of a surprisingly firm fourth quarter but the medium-term profile is much the same.

However, the equilibrium unemployment rate has been revised down (again) from 4.5 percent to 4.25 percent and earnings growth lifted a little higher. With potential growth remaining at 1.5 percent, this suggests that there is already minimal room or any additional pick-up in economic momentum. Indeed, the output gap is seen turning negative by the first quarter of 2020.

All that said, the key problem with today's forecasts is that they have to make vital assumptions about what happens with Brexit - and the final shape of that is still anyone's guess. Consequently, the level of uncertainty surrounding the projections is especially high. Still, while the bottom line is that the limited changes from last time's forecasts are consistent with the steady monetary policy announcement made today, another tightening is probably not very far away.

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.