The Bank of England’s monetary policy committee just significantly raised its growth forecast for the year but warned that some members are close to their tolerance limits on inflation being above the 2% target. Here’s what analysts make of it all.
From Anna Stupnytska, global economist at Fidelity International:
The BoE is certainly in a tough spot as they seek to balance the ongoing cyclical strength of the UK economy while bearing in mind the potential for a Brexit-related slowdown in the months ahead. While the macro backdrop remains encouraging for now, investment intentions are already very depressed relative to growth and consumption is likely to be hit as inflation accelerates further.
The central bank is clearly in the wait-and-see mode for now, but I believe monetary policy will need to become more accommodative as we move through the year, as it is forced to lean against the headwinds of Brexit-related uncertainties. In this respect, I still expect policy to become more accommodative, potentially via the re-introduction of QE later in the year.
From Lucy O’Carroll, chief economist at Aberdeen Asset Management:
This is largely confirmation of what everyone was already thinking. The Bank has raised its short-term growth outlook, but also identified more slack in the economy than previously existed. As a result, its inflation forecasts are relatively unchanged. That should quell some calls for a rate rise, but they won’t go away entirely because there’s dissent on the committee about how much inflation should be tolerated. The Bank does aim to look beyond the kind of currency-driven, short-term inflation that is expected. But clearly some on the committee think it’s going to stick around for longer.
The pressure is on for the press conference, though. The Bank of England is in a bind about how it accounts for Brexit in its forecasts. They know it’s happening, but have no better idea than the rest of us about what it means in practical terms for the economy. So Mr Carney is going to have to somehow give the impression that he knows more than he does. We’ll see shortly whether he pulls this off.
From economists at Barclays:
We remain of the view that monetary policy will remain unchanged over our forecast horizon. The Committee is still trading off between downside risks to growth and upside risks to inflation and we do not believe data at this stage provide sufficient clarity to resolve that dichotomy. Furthermore, recent statements by Committee members imply a rather compact MPC as the more dovish and the more hawkish members have moved closer to the central consensus. A diverging view would have to be expressed by individual members to upset the status quo, which is a process that could take some time and require further data.
From James Knightley, senior economist at ING:
Given the downside risks to growth and upside risks to inflation that Brexit is creating we forecast no change in bank rate until 2019.
We are less optimistic on activity than the BoE. We expect growth to slow to 1.5% this year from 2% in 2016. Employment has fallen in the last two monthly reports while business surveys point to a moderation in investment intentions. Consumer confidence has weakened in response to rising inflation, which is likely to erode household spending power, while consumer credit has taken a noticeable downturn.
On the other hand, inflation continues to move higher (we think it will rise more aggressively than the BoE predicts) as a direct response to the steep drop in sterling. It is most noticeable in petrol prices, which are up nearly 20% on a year on year basis, but food prices are also starting to respond given 40% of the UK’s consumption is imported. Other components are starting to experience pipeline pressures so we expect headline CPI to rise above 2% in the next couple of months and remain above 3% for much of 2H17.
Given we expect growth to be well below trend in 2017/18 we feel the BoE will “look through” the inflation spike, much as it did when CPI rose above 5% in 2008 and 2011.