MPC minutes - is inflation or growth the bigger concern?

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Yesterday's inflation figures presented some good news for the MPC. CPI came in at a lower-than-expected rate of 3% meaning – for the first time in this Parliament – that the Governor of the Bank of England did not have to write a letter to the Chancellor of the Exchequer.

CPI inflation is now at its lowest level since February 2010, but it remains well above target, and has been for over two years.

Yet this morning's MPC minutes hint that increased monetary easing is more likely than an increase in interest rates any time soon. As with last month, all committee members voted to maintain the stock of asset purchases at £325bn with the exception of David Miles, who voted in favour of a £25bn extension to the scheme.

So given the high level of inflation why is more monetary easing on the table?

The UK economy is still weak. As with last week's Inflation Report, the MPC's minutes noted the significant risks to growth associated with the economic turmoil in the Eurozone. Similar points were highlighted yesterday, when the IMF released its review of the UK policy mix. In fact, the IMF argued that weak growth and limited underlying inflationary pressure suggest further monetary easing is required.

Our own forecasts suggest that growth is likely to be weak, and inflation should fall back to target early next year. However, we now expect inflation to return to target later than we previously forecast, due to the increased outlook for oil and commodity prices: upside risks to inflation remain.

As King pointed out during the press release for the Inflation Report, the amount of spare capacity in the economy is difficult to predict, and will be affected by tight credit conditions and economic uncertainty, yet it is precisely this spare capacity that is expected to keep domestic price pressures under control.

Other upside risks to inflation noted in today's minutes:

- developments in global prices, such as for commodities

- growth in domestic costs

- degree to which companies seek to restore margins

The minutes also noted some downwards risk to inflation:

- weak economic activity might result in inflation falling materially below 2% in the medium term

- demand growth might be weaker than expected

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