Bank of England Quarterly Inflation briefing – Aug 2013

We attended the Bank of England’s quarterly inflation briefing at the Madjeski Stadium this morning to hear Chris Piper, Bank of England Agent for Central Southern England present the latest Inflation Report.

If you don’t get the chance to read the 54 page briefing, here are a few of the key messages coming out of the Bank:

• It is only the second quarter in four and a half years that the Bank has upgraded their forecasts from the previous quarter – good news!
• The 2% inflation target remains the primary focus
• Administered and regulated prices (student fees; energy costs) are still a significant contributor to inflation but it is likely to fall back to the target level
• Bank lending to businesses remains weak – a number of banks continue to try to repair their balance sheets, although this is expected to improve
• A key part of their policy decisions is how much spare capacity there is in the economy – productivity remains 8% below its pre-crises level
• Forward guidance
• Main risk continues to be from external factors, especially the Euro area

Some interesting points on ‘Forward Guidance’, announced last week, where the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the unemployment rate has fallen to a threshold of 7%.

The guidance linking Bank Rate and asset sales to the unemployment threshold would cease to hold if any of the following three ‘knockouts’ were breached:

• in the MPC’s view, it is more likely than not, that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target;

• medium-term inflation expectations no longer remain sufficiently well anchored;

• the Financial Policy Committee (FPC) judges that the stance of monetary policy poses a significant threat to financial stability

The first of the knockouts could be an interesting one to watch.

Overall, things are looking better but risks still remain!