The November Inflation Report is remarkably dovish and signals the MPC expects to cut Bank rate by 50 b.p. over coming months.

Key points:

1. The two-year-ahead inflation forecast assuming unchanged 5.75% rates is far below target at an estimated 1.75% (both mode and mean). This is the largest negative deviation in the MPC’s history – see chart.

2. The forecast based on market expectations of a 50 b.p. rate cut by the third quarter of next year is exactly on target.

3. The modal GDP forecast based on unchanged rates shows annual growth slowing sharply from 3.3% currently (expected by the Bank to be revised up to 3.5%) to below 2% by the third quarter of 2008.

4. Risks to the forecast are judged to be balanced for inflation and on the downside for growth, versus on the upside and balanced respectively in the August Report.

So why were rates not cut last week? The minutes will reveal more but the MPC probably wanted to set out its revised economic thinking before acting to avoid accusations of bailing out the financial sector. The forecast that inflation will remain slightly above target during 2008 may also have influenced the majority decision to delay.

Time will tell whether recent financial events warrant the MPC’s dramatic forecast revisions; the economy could well prove more resilient than assumed. However, the Committee’s bias is clear and it is reasonable to expect two quarter-point rate cuts by next spring. I will be guided by the MPC-ometer but the first cut could come as early as next month, with a follow-up move possible in February.