Inflation Report Broadly As Expected - We Still Expect BOE To Hike In No

Overall, the Bank of England (BoE)’s Inflation Report in May came out broadly as we expected. Hence, we still expect the BoE to hike in November as the Bank projects inflation to pick up and reach the 2% target in the medium run and labour market slack to continue to diminish, see also Research UK: We have moved the first BoE hike to November 2015, 15 April.

The BoE increased its inflation projection for 2015 slightly to 0.6% but lowered its projection for next year to 1.6%. The higher oil prices could lead to higher inflation in H2 15 than it previously anticipated while the stronger GBP continues to put downward pressure on inflation. That said, the projection still indicates that inflation will rise above the 2% target in Q3 17. Hence the medium-term inflation outlook, in our view, still calls for a hike later this year. Governor Mark Carney reiterated that the bank will look through one-off effects on inflation as the BoE recognises that monetary policy works with a lag.

The BoE also lowered its projected path for the unemployment rate and now expects unemployment to reach its estimated long-term equilibrium rate of 5.0% in Q1 17. Bank staff estimate that slack is broadly in the region of 0.5% of GDP, which is in line with the February report.

The Bank has also lowered its forecasts for GDP growth for the coming years. It now expects the UK economy to grow by 2.5% this year, down from the previous expectation of 2.9%. Next year, the Bank expects the economy to grow by 2.6%, up from 2.9% previously. The Bank still thinks that the economic outlook is solid despite the slowdown in Q1.

The BoE still expects wage growth to pick up due a combination of higher productivity growth and less slack in the labour market but stated that ‘the uncertainty around the path for wages is considerable’.

In addition to the release of the new Inflation Report, there was also news on the UK labour market. The figures show that the market continued to improve in Q1 despite slower growth. The unemployment rate declined to 5.5% on average in Q1 down from 5.7% on average in Q4 2014. The unemployment rate is now precisely at the Bank of England (BoE)’s estimated medium-term equilibrium of 5.5%.

The number of people employed increased by 202,000 in Q1. The increase was larger than the increase in Q4 (103,000) despite the fact that growth was slower than in Q4. The number of unemployed people declined by 35,000 as the labour force rose by 166,000 in Q1. From an economic perspective, it is very positive that both employment and the workforce are increasing.

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