UK Inflation Report implies no rate hike this year

By Trevor Williams, Chief Economist, Corporate Markets

The Bank of England’s projections in the February 2010 Quarterly Inflation Report (QIR) for economic growth (GDP) and for consumer price inflation (CPI) are lower than those made in November last year. This has resulted in financial market expectations of rate rises being pushed out further into the second half of this year.

But, as the charts below show, there is still an expectation - derived from overnight index swap (OIS) rates - that Bank Rate will rise to 1% by the end of 2010, to 1¾% in June 2011 and to 2½% at the end of next year.

That view is not borne out by the implied path of consumer price inflation in the Bank of England’s latest QIR forecasts, whether based on market implied interest rates or unchanged rates at 0.5%, see charts a and b.

In the Report, the Bank says that: ‘On balance, the Committee judges that….. it is more likely than not that inflation will be below the target for much of the forecast period…’ The implication is clear, there is a
strong probability that Bank Rate may remain at the current record low of 0.5% well into 2011 unless economic conditions improve more than currently expected by the Monetary Policy Committee (MPC).

Read more (PDF, 192 kB)

* All charts are sourced to Lloyds TSB Corporate Markets Economic Research, Bloomberg, IMF and Datastream

 


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