BoE Cuts Inflation and Growth Forecasts

The BoE expects inflation to fall below 1 percent in the near term and growth of 3.5 percent in 2014. Forecasts from November’s Inflation Report signaled a rate rise may occur later than anticipated.

The central bank left 2014 growth forecast unchanged but cut 2015 and 2016 expectations by 0.2 percent to 2.9 percent and 2.6 percent, respectively. 

Excerpts from BoE Inflation Report, November 2014:

There is a significant probability that inflation could temporarily fall below 1% in the near term. Inflation then rises back to the target by the end of the forecast period as external pressures fade and growth in unit labour costs gradually picks up. There are significant risks either side of this inflation projection. Domestic risks to inflation centre on unit labour costs. Wages need to grow more strongly than productivity to return inflation to the 2% target, absent external price pressures.

Four-quarter growth is projected to fall back towards its historical average rate, somewhat above estimated potential supply growth. That central path is a little weaker than in August, reflecting the weaker global outlook and a softer profile for private sector domestic demand, the latter despite a lower implied path for Bank Rate. The risks around that central path are judged to be balanced, rather than skewed to the downside as in August. The projection assumes that overseas growth is slower than in August, particularly in the euro area. The main downside risk stems from weaker euro-area activity, which would weigh on UK exports and could be associated with a further rise in financial market volatility. But there are also risks to the upside — for example, greater momentum in US growth or larger impacts than expected from European Central Bank or Bank of Japan policy actions. 

Domestically, the projection is for solid consumption growth as households reduce their saving rate further, particularly in the near term. The weakness in the housing market bears down on housing investment. Business investment grows strongly, but at a slower rate than projected in August, reflecting the weaker and more uncertain global backdrop. There remains a risk that households may not be willing to cut back saving, particularly if concerns around the economic outlook build. Further out, the medium-term outlook for growth is underpinned by a gradual revival in productivity growth. But there remains considerable uncertainty around that judgement.

The Committee sets monetary policy to meet the 2% target in the medium term and in a way that helps to sustain growth and employment. The Committee gave guidance in its February Report on how it would seek to achieve the inflation target over the policy horizon. At its November meeting, the Committee noted that the central message of that guidance remained relevant: given the likely persistence of the headwinds weighing on the economy, when Bank Rate did begin to rise, it was expected to do so only gradually and to remain below average historical levels for some time to come. The actual path for monetary policy would remain dependent on economic conditions. In other words, the Committee’s guidance on the likely pace and extent of interest rate rises was an expectation, not a promise.

BoE Cuts Inflation and Growth Forecasts

BoE | Joana Taborda |
11/12/2014 11:22:54 AM