The Bank of England Monetary Policy Committee in its May Quarterly Inflation Report accepted that productivity growth is likely to be slower than it previously expected, and forecast a much more rapid fall in unemployment.
The QIR’s inflation forecasts, showing CPI still below the MPC’s 2% target in two and three years’ time, were barely changed from the February projections. These broadly match the average market expectations underpinning the QIR with the first hike not until Q2 2015, although rate expectations have moved forward a bit since the report was compiled.
The lower inflation forecasts reflected, in part, the rise in trade weighted sterling and the report overall leaves it wide open to debate when Bank Rate is first likely to be raised, with divergences of views among MPC members on the report’s key assumptions.
CPI inflation was forecast to stand at 1.89% in Q2 2016 and 1.95% in Q2 2017 on the modal projection on market rates. The was the same as the February QIR forecast of 1.89% in Q2 2016 and 1.91% in Q1 2017.
The BOE showed the jobless rate falling to 6.1% in Q2 2015 and holding at 5.9% from Q2 2016 through Q2 2017. This was sharply lower than the February prediction of 6.5% in Q2 2015, and 6.4% in Q2 2016.
While the jobless rate looks set to fall faster than the MPC previously accepted, the BOE has also lowered its estimate of the medium term equilibrium, or non-inflationary, jobless rate.
The QIR puts the medium term equilibrium jobless rate range at 5.25% to 5.75%, down from the 6.0% to 6.5% in the February QIR.
The forecasts do not show the jobless rate hitting the upper end of the new equilibrium range within the three year forecast horizon. However, as BOE Deputy Governor Charles Bean has said the MPC would be expected to tighten policy before the equilibrium rate is hit as policy acts with a lag.
MPC members, however, are divided over just how much slack there is in the economy. The QIR restated the February estimate that economic slack is within a range of 1.0% to 1.5% of GDP.
However “there is considerable uncertainty around the margin of slack” and the QIR detailed assessment highlighting the complexity of the issue of how far the self-employed should count towards economic slack.
“Members of the committee hold a range of views about the extent to which self-employment represents a form of labour market slack,” the QIR said.