ITEM Club responds to the Bank of England's Inflation Report
Nida Ali, economic advisor to the EY ITEM Club, comments on the Bank of England’s Inflation Report:
- Downward revisions to both growth and inflation were broadly in line with expectations
- There was no clear sign of further monetary stimulus as MPC members are in wait-and-see mode to judge how their recent policy initiatives feed into the economy
- But if downside risks from the Eurozone were to materialise the Bank may find that it needs to provide further monetary support
“The downward revisions to both growth and inflation were broadly in line with expectations and largely reflect recent events rather than a change of view. Monthly economic indicators, in particular business surveys have been relatively soft over the past couple of months and the official data has continued to disappoint.
“For once the Bank had been too cautious in May about the pace at which inflation would fall. Most of the temporary factors that had kept inflation elevated over the past couple of years have now unwound, but spare capacity in the economy is likely to continue to exert downward pressure on price. The Bank's forecast for inflation slightly undershooting the 2% target in the medium-term seems sensible.
“Over the past couple of months, the Bank has taken a number of initiatives to loosen monetary policy, such as raising the level of asset purchases, introducing the Funding for Lending Scheme and activating the Extended Term Repo Facility. MPC members are now in ‘wait-and-see mode’ to judge how they feed into economy and there was no indication of any further monetary stimulus in the near future. Assuming that the Governor’s comments were representative of the majority on the Committee, they also appeared to head off any chance of a rate cut.
“According to the Bank's central forecast, inflation is already expected to remain slightly below the 2% target for a prolonged period. This could worsen further if downside risks to the outlook were to materialise, particularly from the Eurozone. Were such a scenario to play out, it would force the Bank to provide further monetary support.”