MNI STATE OF PLAY: BOE On Hold; Sees Inflation Going Above 3%

The Bank of England is soon set to face inflation moving more than a full percentage point above target but it will continue to lean strongly against downside risks, the minutes of the latest meeting revealed on Thursday, as its staff economists revised up near-term growth and inflation forecasts.

Inflation is "expected to pick up further above the target, owing primarily to developments in energy and other commodity prices, and is likely to exceed 3% for a temporary period," the minutes of the June meeting of the BOE's Monetary Policy Committee showed. In the May Monetary Policy Report forecast round CPI inflation had been shown moving above the 2% target and peaking at 2.47% in Q4 of this year.

The MPC, which left policy and its guidance on hold this time, will go through the full forecast round ahead of the August meeting but the Bank's staff's latest updates gave a foretaste of what the new projections are likely to show, with quarterly growth in Q2 expected to come in at 5.5%, up from 4.25% at the time of the May Report, and inflation to peak above 3%.

Rising inflation is not yet feeding through into household inflation expectations, which the minutes said not had fallen near-term and were pretty stable longer term, although financial market inflation expectations have risen, with five-year forwards up around 15 basis points since the start of the year.

LOOK THROUGH

Yet the MPC may soon be facing, at least temporarily, a situation where it will have to decide whether to look through a period of above-target inflation.

The majority on the committee are likely to be prepared to keep holding fire before tightening, with the minutes stating that "Policy should both lean strongly against downside risks to the outlook and ensure that the recovery was not undermined by a premature tightening in monetary conditions."

While MPC members were divided as to whether higher inflationary pressures would prove to be sustainable, the one dissenting vote came from Chief Economist Andy Haldane, who again voted to lower the target stock of asset purchases to GBP825 billion from GBP875 billion. As this was his final meeting, and as the Bank is already closing in on the target, having got more than halfway through the current GBP150 billion purchase round, his vote seems to be largely symbolic. The nine member MPC was unanimous in voting to leave Bank Rate at 0.1%.