A speed read. You’re welcome.
Rates and QE are on hold, of course, and the vote was unanimous.
Winter may be coming…
Continued moderation in pay growth and higher import prices following sterling’s depreciation are likely to mean materially weaker household real income growth over the coming few years. As a consequence, real consumer spending is likely to slow.
…but certainly not yet
The MPC has increased its central expectation for growth in 2017 to 2.0% and expects growth of 1.6% in 2018 and 1.7% in 2019. The upgraded outlook over the forecast period reflects the fiscal stimulus announced in the Chancellor’s Autumn Statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households.
Sterling is causing headaches
The value of sterling remains 18% below its peak in November 2015, reflecting investors’ perceptions that a lower real exchange rate will be required following the UK’s withdrawal from the EU. Over the next few years, a consequence of weaker sterling is that the higher imported costs resulting from it will boost consumer prices and cause inflation to overshoot the 2% target. This effect is already becoming evident in the data.
The BoE is not a super hero
Monetary policy cannot prevent either the real adjustment that is necessary as the UK moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany it over the next few years.
Spot the difference, inflation forecasts edition
CPI inflation has risen markedly over the past year and is judged likely to return to around the 2% target by February. Much of the rise to date reflects the elimination of past drags from food, energy and import prices, together with renewed rises in oil prices. The projected path for inflation over the next three years in large part reflects the impact of higher import prices following sterling’s depreciation. In the run-up to the February Report, the sterling exchange rate was 3% higher than three months earlier, but still 18% below its late-2015 peak. Higher import prices are judged likely to have their greatest effect on CPI inflation in around a year’s time, but still to be pushing inflation above the 2% target at the end of the forecast period, fully accounting for the overshoot. Following sterling’s recent appreciation, the CPI projection is slightly lower than three months ago further out. The risks around the inflation projection are balanced.
Brexit matters (obviously)
The outlook for supply also depends on the United Kingdom’s post-Brexit trading arrangements and their impact on companies’ operations. The projections in this Report continue to be conditioned on the average of a range of possible eventual outcomes for those arrangements. Given those different possible outcomes, uncertainty is assumed to remain elevated, albeit a little lower than in the November Report, weighing on investment though less so on consumption.
Key judgments and risks