The latest quarterly Inflation Report from the Bank of England, published this morning, makes for some interesting reading.
The UK economy is continuing to recover from recession. The Report notes that global output has grown robustly over the past quarter, although some fragilities remain in the global economy.
Inflation is likely to remain above the target of 2% during 2011. The Bank still believes that price inflation is likely to fall back after 2011, as a result of the continuing downward pressure from the persistent margin of spare capacity in the economy.
In line with the differing views from various economists, the Bank sees the chances of inflation being either above or below the 2% target by the end of their forecast period in 2013 as being roughly equal.
It is this combination of economic recovery and prospects for inflation that will drive future interest rate decisions. Whilst the Bank has a mandate to control price inflation, they are still unlikely to take steps that will risk a return to recession.
It is worth noting that the inflation prospects for 2011 look a little higher than they did in the previous Inflation Report three months ago. This is, in part, the result of higher import costs.
The Bank is clearly relying on the ‘spare capacity’ argument to bring inflation down to a more manageable level later in 2011 and into 2012, in line with or below their target.
It is difficult to judge whether the information in this Report results in a greater chance that interest rates will be increased sooner than previously expected.
The Bank points out that the MPC is ready to respond with monetary policy in either direction (rates up or their asset purchase programme extended) depending on how the inflation picture develops in the future.
This Report leaves the door open for several options over the coming months, depending on how the inflation and economic growth picture develops. Whilst the consensus decision from the MPC remains no change to interest rates or QE, we should all remain ready for the possibility of change to this situation soon.
You can read the Inflation Report in full here.
