Today's Inflation Report contains no major surprises. The backdrop is one of continued strong performance of the UK economy – output has been growing, unemployment has continued to fall and inflation remains close to the 2% target. In light of this, the Bank has boosted its growth forecast and maintained its inflation forecast over the next 5 years.
The forecast for GDP growth has been raised over the medium-term.
The Bank of England are still forecasting GDP growth of 3.4% in 2014 but have raised their forecast for 2015 by 0.2 percentage points to 2.9%.
Mark Carney said that there are signs of greater balance to growth, which will underpin the expansion in the economy. The UK economy is showing signs of moving away from such a strong reliance on household spending and is seeing a greater contribution to growth from investment. However, the bank remains cautious about productivity, which has yet to show a material pick-up. The forecast and expectations of a more balanced picture of growth does rely on productivity growth improving gradually over the forecast horizon.
There is still a lot of uncertainty and risk to the outlook, which relies on a pick-up in productivity and real incomes, and continued recovery in business investment. The level and path of slack in the economy is another big unknown and there are a range of views on this within the MPC. Internationally there are also a number of risks such as the adjustment needed in the Euroarea, financial market stability and the expansion in the shadow banking system in China.
Inflation is expected to remain at or slightly below target over the forecast period
Overall, the inflation forecast is largely unchanged. Inflation is expected to be on target at the end of the forecast period in three years' time. The interim path for inflation will likely see it stay slightly below target, with pressure from Sterling's appreciation expected to put downward pressure on inflation over the next few years. See our blog yesterday for more info on the exchange rate.
What about the bank rate?
Carney indicated that we have edged closer to a rise in the bank rate. The actual path of the Bank rate will depend on economic conditions and is likely to be both small and gradual. Carney also said that the Bank rate would likely remain at or around historic lows, which leaves quite a wide band for speculation.