Changes to growth and inflation forecasts are small, as these fan charts from the Bank of England show:
Policy “could need to be tightened by a somewhat greater extent” than markets currently suggest, but crucially, assumptions on Brexit are optimistic. It says:
In the MPC’s latest projections there is such a trade-off through most of the forecast period, with a degree of spare capacity and inflation remaining above the 2% target. In the final year of the forecast, however, the output gap closes and inflation rises slightly further above the target. This is conditioned on the assumptions that the adjustment to the United Kingdom’s new relationship with the European Union is smooth, and that Bank Rate follows the market-implied path for interest rates.
Once again, the BoE points out that it’s not a superhero.
Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years. Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth. For this reason, the MPC’s remit specifies that, in such exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity.
Markets expect the BoE to stay lower for longer.
Domestic UK stocks are lagging global trends.
Unemployment is falling faster than the BoE had predicted.
Read more from the FT’s Chris Giles here.