GB: BoE Inflation Report

Thu May 10 06:00:00 CDT 2018

The BoE's new Quarterly Inflation Report (QIR) acknowledges the first quarter's downside surprises on growth and inflation and forecasts for both have been revised down. In itself, this provides the justification required for today's MPC decision to leave Bank Rate unchanged at 0.5 percent.

Following the sharp undershoot of the Bank's first quarter growth forecast (quarterly rate 0.3 percent versus actual 0.1 percent), the economy is now seen expanding just 1.4 percent in 2018. This is a full 0.4 percentage points short of the February call. However, quarterly predictions thereafter are hardly changed confirming that the slowdown is expected to be only temporary. The BoE seems to ascribe a more significant negative impact from the bad weather in late February/early March than the ONS. Meantime, the assumed equilibrium unemployment rate remains at 4.25 percent, so the current reading (4.2 percent) suggests there is no slack left.

On the basis of market-implied interest rates, inflation had been forecast to remain above target throughout the 3-year projection horizon. However, now the 2 percent mark is expected to be reached in the third quarter of 2020 and inflation is seen essentially holding at that level through the second quarter of 2021. This assumes three interest hikes over the period and just one this year.

In sum, the revised QIR suggests that UK interest rates will not have far to rise in the current cycle. In addition, the timing of the next move is surrounded by considerable doubt and will be heavily dependent upon upcoming economic data. In fact, there is more than a small chance that policy could be on hold through year-end.

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.