Last week’s Inflation Report was regarded as slightly hawkish but I was struck by the forecast based on unchanged interest rates, showing an annual CPI increase of just 1.77% in the first quarter of 2010. Despite two rate cuts and a sharp fall in sterling, this was only 3 bp higher than the two-year-ahead forecast in November’s Report and represents the second largest shortfall from target in the MPC’s history.

The message was reinforced by today’s minutes of the February meeting, showing an 8-1 vote in favour of the quarter-point cut, with David Blanchflower dissenting in favour of a 50 bp move. This is considerably more dovish than the 5-4 split suggested by both my MPC-ometer and the Sunday Times Shadow MPC.

In light of this information, and ongoing deterioration in credit markets, I now expect an early further cut in rates despite the prospect of a surge in CPI inflation to 3% by the third quarter of 2008. I will be guided by the MPC-ometer but a move seems likely before the next Inflation Report in May.

My personal view is that rates should be held at 5.25% until inflation is over its hump. The MPC’s mandate is to meet the 2% target “at all times” not just at the two-year horizon. It is true that its policy actions have a negligible effect on near-term inflation prospects but they are relevant one year ahead, when the Inflation Report suggests the annual CPI increase will still be well above target, at 2.29%.