Prospects of higher inflation and weaker growth have given the MPC a dilemma - ITEM Club

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Nida Ali, economic advisor to the EY ITEM Club comments on today’s MPC minutes:

  • The prospects of higher inflation and weaker growth have given the MPC a dilemma 
  • Encouraging forecasts for both inflation and growth in February's Inflation Report will probably be revised accordingly
  • The Bank is unlikely to authorise more QE but, with the Eurozone crisis still unresolved, contingency plans should be in place

“The upside risk to inflation, on the back of higher oil prices, has clearly thrown the MPC off guard, causing even Adam Posen to withdraw his call for more QE. But with growth prospects now looking weaker than a couple of months ago, the MPC faces a major dilemma.
 
“The February Inflation Report had seen inflation meeting the 2% target in the medium-term and upbeat forecasts for growth. This suggested that the MPC was quite content with its policy response to the flagging recovery. However recent developments, including the weaker than expected manufacturing and construction figures and an increase in oil prices, calls for a revision of these forecasts.
 
“In our view, the Bank is unlikely to authorise more QE in the coming months, especially in light of the latest oil price developments. However, whilst uncertainty in the Eurozone remains, we would urge the Bank to have contingency plans in place in case the crisis escalates further.”