The Bank of England’s Monetary Policy Committee has published forecasts showing inflation will be close to target if the first rate hike comes in the second quarter of 2015.
In its Quarterly Inflation Report, the MPC revealed it had not lowered the 7% jobless policy threshold – the level at which it will first consider hiking rates. Instead, it set out guidance saying that there was scope to absorb further slack in the economy before tightening and when rate hikes did come they would be gradual.
There had been intense speculation that the MPC may go down the route of publishing its own rate projections, but it did not do so, with BOE Governor Mark Carney having previously highlighted the shortcomings of this approach.
Instead, the MPC produced forecasts showing that, despite revising up its growth forecasts, inflation was set to settle close to its 2% target if market expectations for a first hike in April 2015 materialized.
The MPC did nudge down its estimate of where the natural, or non-acceleraing inflation rate, for unemployment lay, to a 6.0 to 6.5% range from 6.0%.
It left the jobless level at 7.0% and predicted this was hit in January this year, with the rate at 7.1% in the three months through November.
The MPC has chosen to go down the route of what analysts have termed “soft guidance”, with no numerical thresholds and instead just descriptions of the likely path of policy.
The committee said that at the start of its forecast period it estiamted the output gap at 1% to 1.5%.
“The MPC … judges that there remains scope to absorb spare capacity further before raising Bank Rate,” it said in the QIR.
While noting the uncertainty of the path of rate hikes, the committee said “when Bank Rate does begin to rise, the appropriate path so as to eliminate slack over the next two to three years and keep inflation close to the target is expected to be gradual.”
It added that “the appropriate level of Bank Rate is likely to be materially below the 5% level set on average by the Committee prior to the financial crisis.”
The inflation forecasts were revised down from November. The CPI projection was lowered to 1.9% in Q4 2014, from 2.1%, to 1.8% in Q4 2015 from 1.9%, and left unchanged at 1.9% in Q4 2016.
At the same time, growth was revised higher to 3.4% this year, from 2.9% in 2014, and up to 2.7% in 2015 from 2.5 and to 2.9% in 2016 from 2.7%.