Growth and inflation outlook a headache for BoE

17th November 2010

It was widely expected that the three-way split at the MPC's November 3-4 meeting would remain, with Adam Posen continuing to push for pegging  rates at 0.5% and an increase in the size of the asset purchase programme by £50 billion to £250 billion.

Andrew Sentance remained the lone hawk, repeating his call for an 0.5% hike and keeping the asset buying programme £200 billion. The remaining seven members, meanwhile, voted to maintain both rates and the purchase programme at 0.5% and £200 billion respectively.  This Daily Telegraph article highlights the policy differences between Sentance and Posen.

The minutes admit a notable lack of assuredness on the part of the MPC collectively about the future path for growth and inflation. The outlook for growth remains ‘highly uncertain', with the range of views among MPC members over the likely effects on growth of various factors ‘wider than usual'.

Downside risks

These factors include the contribution of net trade to growth, which has so far been weaker than the MPC expected. It is ‘unclear' how persistent this weakness will prove to be. 

Another is private demand, which could grow rapidly on recovery in confidence and business reinstated investment projects previously put on hold. However, there are ‘significant downside risks' to the upward path in private demand, especially household spending.

The Committee's best collective judgement currently is that GDP growth going forward is a little more likely to be above its historical average than below it for much of the forecast period.  Even so, the MPC believes that the large fall in output during the recession means some spare capacity is likely to persist.

Uncertain paths

Third quarter GDP growth, revealed in late October, and as reported on by Mindful  Money, came in at 0.8%, faster than expected by the MPC. The minutes note however that "even taken at face value, some of that strength might prove temporary".   

As for inflation, the MPC says there are now "substantial risks" to the inflation outlook as a result of uncertainty over developments in commodity prices, the degree of spare capacity and its impact on wages and prices, and evolution of inflation expectations.

Overall, the MPC reckons inflation is likely to stay above the 2% target throughout 2011, given the forthcoming rise in VAT to 20% and continuing increases in import prices.  As the impact of those factors on inflation diminishes, inflation is likely to fall back, reflecting continuing downward pressure from the persistent margin of spare capacity. 

The MPC warns however that "the timing and extent of that decline in inflation are highly uncertain" adding that "the chances of inflation being either above or below the target by the end of the forecast period are judged to be roughly equal".

Simon Ward, chief economist at Henderson Global Investors, for one, believes UK inflation will hit 4% in early 2011, as reported here by Mindful Money.

Another dove

While Posen and Sentance remain at the extreme ends of the MPC in terms of their policy stances, another member, Martin Weale, has also recently sounded a dovish note, as reported here by the Telegraph. Weale believes the Bank of England should provide another boost to the UK economy if output stays below trend as expected.

The Telegraph has gathered these reactions from economists to the latest MPC minutes.

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