ITEM Club comments on the Bank of England's Inflation Report - downside risks to growth are greater than the charts suggest

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Nida Ali, economic advisor to the EY ITEM Club, comments on the Bank of England’s inflation report:

  • The latest Inflation Report is broadly in line with expectations, with growth revised down and inflation increasing.
  • But the downside risks to growth are greater than the fan charts suggest.

“The latest Inflation Report from the Bank of England is broadly in line with expectations, with downward revisions to growth and an upward revision to inflation. The short-term growth forecasts still look strong, but this is partly because the Bank assumes a much higher starting point than the ONS data.
 
“However, the Bank has once again chosen to exclude the more extreme outcomes of the Eurozone crisis from its fan charts and so the downside risks could potentially be far greater.

“There is also no clear steer on monetary policy. The Committee decided against additional QE, yet the forecast shows inflation coming in below target at the two-year horizon. This could be indicative of divisions on the Committee.
 
“The Bank has also been non committal about its contingency plans, should the Eurozone crisis escalate. The Bank needs to send a clear message that it will do whatever it takes to support the UK economy, in case the situation takes a turn for the worse.”