ITEM Club comments on today's Bank of England Inflation report

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

  • GDP and inflation projections more positive than the last report
  • But downside risks are probably greater than the fan charts suggest
  • With inflation nearly back to the 2% target by the end of 2013, more QE may now be halted

“Today's inflation report is more positive than the previous quarter. GDP growth for 2013 has been revised up and the fan charts suggest a lower probability of recession in 2012. The inflation undershoot at the two-year horizon has also been reduced. Although, having loosened monetary policy substantially over the past few months, these revisions weren’t unexpected.
“However, the Bank has once again chosen to exclude the more extreme outcomes of the Eurozone crisis from its projections. Given the high degree of uncertainty surrounding the assumption that the Eurozone crisis will be resolved in an orderly fashion, this suggests that downside risks to growth are greater than the fan charts suggest.
“After authorising £125bn of more QE over the past few months, the central forecast for inflation is nearly back to the 2% target by the end of 2013. This raises doubts about whether the Bank will increase the level of asset purchases in the coming months. However this may change if the Eurozone crisis escalates.”


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