- The MPC now thinks CPI inflation could exceed 3%, with the risk of an even bigger overshoot of the Bank of England’s 2% target. However, the majority on the committee kept to the view that higher inflation this year will be transitory
- In his final meeting, Andrew Haldane voted again to scale QE back by £50bn. And there were differences of opinion on judging whether inflationary pressures were temporary or persistent. But the risk of the committee being rushed into a marked change of tone, or a move in policy, soon looks low
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“The outcome of June’s Monetary Policy Committee (MPC) meeting repeated that of the previous month. The committee voted unanimously to keep Bank Rate at 0.1% and 8-1 to maintain the target stock of asset purchases at £895bn. Andrew Haldane, who leaves the MPC this month, repeated his vote in May to cut asset purchases this year from £150bn to £100bn.
“The policy statement was stronger in several respects. The MPC thinks the economy will grow 5.5% in Q2, up from 4.25% expected in May. CPI inflation is predicted to exceed 3%, compared to a peak of 2.5% previously forecast. And there was a risk inflation could pick up even more. But with higher prices expected to be primarily driven by energy and commodity, the committee stuck to the view that above-target inflation should be temporary. And it reiterated its focus on medium-term prospects for inflation, rather than “transient” price pressures. So the risk of the MPC being rushed into a major change of tone, or a move in policy, anytime soon looks low. That said, there was a difference of view among the MPC in judging whether inflationary pressures were temporary or persistent. One view attached weight to short-term data, while another favoured a longer-term perspective, including waiting until the furlough scheme had unwound.
“The EY ITEM Club shares the MPC’s view that inflation should settle back to around 2% in the medium term. And forces influencing consumer prices in the short term are not all one way. The stronger pound will weigh on import prices. And that the supply-side of the economy may exit the pandemic relatively unscathed implies that spare capacity is likely to persist for some time. So the EY ITEM Club continues to expect that the MPC will not start raising Bank Rate until late 2022 or early 2023.”