The Monetary Policy Committee kept Bank rate unchanged at 0.5% despite evidence that the medium-term inflation outlook has deteriorated since the February Inflation Report.
That Report itself signalled a need for policy tightening, forecasting above-target inflation of 2.5% in two years' time if interest rates were held at 0.5%. The alternative projection based on market interest rate expectations was in line with the target but assumed that Bank rate would average 0.7% during the second quarter, implying a quarter-point increase in April or May.
Since February, actual inflation has again overshot the Bank's projection while commodity prices are now stronger and sterling weaker than assumed in the Report. The Bank's first-quarter inflation attitudes survey showed a rise in medium- as well as short-term inflationary expectations and wage settlements have moved up to an average 2.6% in the three months to February, versus 1.5% a year ago, according to Incomes Data Services.
Economic news has been mixed but not obviously softer than implied by the February forecast. First-quarter GDP could be held back by carry-over weakness in construction output following December's bad weather but construction orders and surveys suggest a strong rebound (February output is released tomorrow). Services activity has recovered solidly in early 2011 while private-sector labour demand continues to firm, judging from hiring intentions and online vacancies.
The news since February, therefore, argues for a further upward revision to the Bank's inflation forecast, which was already barely consistent with the target. The MPC's continued inaction is, at least to this author, baffling. The Bank, it seems, is prioritising supporting growth and assuming that this objective can be traded off against higher inflation. Such an approach is both misguided and in conflict with its inflation-targeting remit.