ITEM Club comments on the Bank of England’s inflation report
Nida Ali, economic advisor to the Ernst & Young ITEM Club, comments on the Bank of England’s inflation report:
Today’s inflation report contained few surprises as the short-term growth forecast was downgraded while the medium-term outlook for inflation was pushed down further
The downside risks are probably greater the fan charts suggests
With a higher probability associated with a recession next year, monetary policy is likely to be loosened further
"Today’s inflation report contained few surprises. The Bank’s move to re-start QE in October had made it clear that we would see a substantial downgrade in the UK’s short-term growth forecasts today, and a further deterioration in the medium-term outlook for inflation.
"It is interesting that the Bank has chosen to exclude the more extreme outcomes of the Eurozone crisis from its fan charts. That suggests that the downside risks are somewhat greater than the fan charts imply. Even without these risks, the charts reveal a much higher probability of a UK recession than the August inflation report had.
"The central forecast shows a substantial undershoot of inflation at the two-year horizon of almost one percentage point – this suggests that further QE is certain. The Governor made clear that this will be through gilt purchases, but we have our reservations about its effectiveness in boosting growth this time around. Interest rates on the other hand are likely to remain at 0.5% until well into 2013 and quite possibly for some time after."
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