The November Inflation Report is super-dovish and signals early further policy easing, confirming the message of the “MPC-ometer” model, which suggested that the MPC would either cut Bank Rate or boost the QE2 programme at its November meeting.

A key summary measure of the Committee’s bias is the two-year-ahead mean forecast for CPI inflation based on unchanged policy. This was 2.08% in the August Inflation Report but has been slashed to an estimated 1.25% this quarter – the lowest since the depths of the financial crisis in February 2009. (The projection, moreover, contains an upward bias because it excludes “the most extreme outcomes in the euro area”.)

The implied policy adjustment necessary to move the two-year-ahead forecast back to the 2% target can be estimated from “ready reckoner” sensitivities provided in an article assessing QE1 published in the last Bank of England Quarterly Bulletin. According to the article, “a 100 basis point cut in Bank Rate increases CPI inflation by about ½ percentage point after 18 to 24 months” while the effect of the £200 billion QE1 programme “was equivalent to a 150 to 300 basis point cut in Bank Rate”. These numbers imply that the ¾ point boost to inflation necessary to hit the 2% target in two years’ time would require either an impossible 150 basis point cut in Bank Rate or between £100 billion and £200 billion of additional gilt purchases.

At a minimum, therefore, the Inflation Report suggests that the MPC will either expand QE2 by £100 billion, or else combine a £75 billion increase with a quarter-point cut in Bank Rate to 0.25%. Further action is likely to be announced at the December meeting, barring surprise positive developments in the Eurozone.