As expected, the Monetary Policy Committee voted to suspend reserves-financed asset purchases at £200 billion while maintaining Bank rate at 0.5%.

The key passage in the accompanying statement is:

On balance, the Committee believes that the prospect is for a gradual recovery in the level of activity. The recession has probably impaired the supply capacity of the economy, but the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come. That is likely to mean that inflation will fall below the target for a period.

The comparable passage in November was:

On balance, the Committee believes that the prospect is for a slow recovery in the level of economic activity, so that a substantial margin of under-utilised resources persists. That will continue to bear down on inflation for some time to come, offset in the short run by the impact of the past depreciation of sterling.

The changes are subtle but possibly significant. The Bank appears to be signalling that it underestimated supply-side damage from the financial crisis and recession, implying that the "output gap" – while "substantial" – is smaller than previously assumed. Accordingly, spare capacity is now judged likely to result in inflation declining "for a period" rather than "for some time to come". The Bank, however, continues to forecast a temporary undershoot of the target, although few will be convinced given its recent record.

The statement makes the following reference to the recent inflation surge:

CPI inflation has risen sharply to well above the 2% target, reaching 2.9% in December. That rise was largely accounted for by higher petrol price inflation and the reduction in the main VAT rate a year earlier dropping out of the calculation.

While it is true that December's sharp rise was largely due to petrol prices and the VAT base effect, it is highly misleading to suggest that the significant overshoot of the 2% target reflects these factors. The standard VAT rate was 15% in both December 2008 and December 2009, while core inflation – excluding food, alcohol and tobacco as well as petrol and other energy prices – has risen to an annual 2.8%.