The May Inflation Report suggests that more QE is in the offing but the Bank of England is reserving its ammunition until the fall-out from the Eurozone crisis becomes clearer. The Bank, however, continues to deny any responsibility for improving credit conditions, despite believing that credit constraints have contributed to supply-side weakness.

The Report downgraded the Bank’s growth forecast while maintaining a projection of below-target inflation in two years’ time. The mean two-year-ahead inflation expectation based on unchanged policy seems to be 1.8%, the same as in February, based on “eye-balling” the relevant fan chart. This raises the question of why more QE was not announced last week, as suggested by the “MPC-ometer” used here to predict the monthly decision.

One possible explanation is that the Bank felt constrained by another forced upward revision to its shorter-term inflation forecast – the mean projection for the second quarter of 2013, for example, has been raised from 1.65% to an estimated 2.3%. This, however, would be at odds with its usual focus on the two-year horizon, while the Report plays down the significance of the change.

The more likely reason for inaction is that the Bank is waiting for the full horror of the Eurozone crisis to be revealed before calibrating its next programme. Delay, moreover, leaves the door open to co-ordinated action with other central banks, for example in the event of a forced Greek exit from EMU – the Bank may believe this would deliver more “bang for the buck”.