BoE Inflation Report: quick comments
Simon Ward
Post a Comment
Markets have interpreted the Report as boosting the chances of early rate cuts. However, the key message is that the growth / inflation trade-off has deteriorated and a much deeper economic slowdown will now be required to bring inflation back to target in two years’ time.
Key points:
• The mean inflation forecast in two years’ time based on an unchanged 5.0% Bank rate remains slightly above 2% and is essentially unchanged from the May Report.
• The forecast based on market rates is lower than in the last Report but this mainly reflects a shift in market expectations, which are 40-50 basis points higher than in May.
• More dovishly, the three-year-ahead projection has been reduced and is now clearly below the 2% target. However, this does not necessarily imply scope for an early reduction in rates.
• The changes to the growth projections are more striking, with the annual change in GDP now projected to fall to zero in the second quarter of next year. The May Report showed a trough at 0.9% in the first quarter.
• However, a V-shaped recovery is forecast in the second half of 2009 and first half of 2010 – this does not suggest a need for aggressive rate-cutting.
Mr. King was diplomatic about fiscal policy but any reduction in rates will clearly become more difficult if borrowing targets are allowed to slip further.
View Printer Friendly Version
Email Article to Friend
Reader Comments