Pain delayed, but not averted - EY ITEM Club comments on MPC's report

3 November 2016

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  • MPC concedes it has been too gloomy since Brexit vote…
  • …but still downgrades its longer-term forecast, reflecting higher inflation and the risk of more prolonged Brexit uncertainty
  • In MPC’s view, pain has been delayed, not averted

Martin Beck, senior economic advisor to the EY ITEM Club, comments:

“Given the economy’s recent robust performance, the Committee’s decision to keep policy on hold was eminently predictable. But a robust economy was not the only factor behind this. Sterling’s renewed drop since September and the expectation that a weaker pound will translate more quickly to inflation also played a role. 

“The stronger than expected expansion in Q3 lies behind much of the upward revision to growth in 2017, from 0.8% to 1.4% - one of the largest upward revisions to year-ahead growth since 1997. However, the MPC remained downbeat on longer-term prospects, cutting its forecast for growth in 2018. Thanks to the spending power-sapping effects of higher inflation and concerns that Brexit-related uncertainty will persist for longer, it now expects the post-referendum hit to GDP by 2019 to be slightly larger than predicted in August. So pain delayed but not averted.

“Meanwhile, although the rise in the inflation forecast delivered the biggest overshoot relative to the 2% target since the Bank was given operational independence in 1997, in our view, the MPC still looks a tad optimistic. The minutes of November‘s meeting noted that there are ‘limits’ to the extent to which above target inflation can be tolerated, although no details were provided of what those limits might be. Short of a crash in the economy, this would appear to rule out further monetary easing.”