By John Ashcroft, Chief Economist at Greater Manchester Chamber of Commerce
The Bank of England Inflation Report was released this week. It was all so predictable. The Governor’s opening remarks explained, “The overall outlook for GDP growth and inflation in this Report is little changed from February. The UK economy continues to perform strongly, having increased by more than 3% in the past year. Output is now close to regaining its pre-crisis level, 700,000 more people are in work than a year ago, and inflation is below, but close to, the 2% target."
The expectations are for growth to increase by 3.2% in the second quarter with continued expansion in household spending, supported by an increase in real wages as inflation remains close to target and earnings increase moderately, with improved productivity.
The MPC obsession with spare capacity continues. “While there is a range of views on the Committee, the best collective judgement is the margin of spare capacity, around 1% to 1.5% of GDP.” Does this impact on inflation prospects? Not so much.
International inflationary pressures, key to current price trends, remain subdued. “The global picture is consistent with muted external inflationary pressures which, coupled with Sterling’s appreciation, will moderate CPI inflation in the near term.” Inflation has fallen sharply since the Autumn and the outlook for inflation in the medium term remains benign.
The benign outlook for inflation will avoid undue pressure in the short term to increase rates despite the strong growth figures. So what of interest rates? The strength of the recovery has moved the economy “closer to the point at which interest rates will have to rise”. So when will rates rise?
In February, the MPC were happy to attach some credence to the market view that rates would begin to rise in the second quarter of next year. If anything the view in May is slightly more “dovish” or certainly more obtuse.
“Our guidance is giving businesses and households confidence that we won’t take risks with price stability, financial stability, or the incipient expansion. It will promote the recovery in business investment, productivity and real wages that a sustained expansion demands.”
Forward guidance then morphed into strikers instructions, as the Governor explained.
“Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement but not the ultimate goal. The real tournament is just beginning and its prize is a strong, sustained and balanced expansion. Across the Bank we are setting policy in order to help win that prize for the good of the people of the United Kingdom.”
Yes, the Governor is employing sporting analogies and laying out his formation.
A flat back four - growth up, inflation down, unemployment up, borrowing down. Two strikers up front, household spending, now with support from business investment. Some confusion in mid field from the housing market but no mention of exports and rebalancing. So expect the odd own goal from the trade performance, as we move into the final stages of the competition.
The Governor is not “taking away the punchbowl as the match gets going”. You may continue to consume alcohol on the terraces for now. The final whistle will not be blown for some time yet.” Base rates are not expected to rise anytime soon.
For more details of our interest rate and other forecasts check out the Quarterly Economics Update due at the end of May.