The May Inflation Report is markedly more pessimistic about both inflation and growth than in February and confirms that early further interest rate cuts are off the MPC’s agenda:
- The central projection based on unchanged rates shows CPI inflation at or above 3% for a year, peaking at 3.7% in the fourth quarter. The fan chart suggests a 30% probability of a peak at or above 4%.
- The central forecast is on target at the two year horizon assuming unchanged rates, having been significantly below (1.77%) in the February Report. Moreover, risks to this forecast are judged to lie on the upside, having been viewed as balanced in February.
- Annual GDP growth now troughs at 0.9% in the first quarter of 2009 in the central forecast on unchanged rates, compared with a February low of 1.4%. However, a significant rebound is still projected by 2010 – it is unclear why given reduced prospects of interest rate cuts.
- The GDP fan chart suggests a 15% chance of an annual contraction in the first quarter of 2009. This implies a significant probability of two negative GDP quarters over the next year – perhaps around 30%.
The one silver lining in the
Report is that its forecasts are sufficiently pessimistic to create the possibility of favourable economic surprises over coming months.
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