Posted February 12, 2015 Ashley Chadwick
With the release of the Bank of England’s Quarterly Inflation report the expectations of UK inflation over the next few years has been outlined. There was expected mention of current low inflation rates, requiring Mark Carney to write a letter to George Osborne, highlighting that there could be a brief spell of deflation in the coming months. Recent disinflation has been largely due to the fall in the Oil price, which has seen energy prices tumble for consumers. Also, relative strength of the Pound, particularly against the Euro, has contributed to lower inflation, with imports becoming cheaper.
However, the statement and the conference held after were more Hawkish on the whole. This was due to the projection that inflation will rise above the MPC’s 2% CPI inflation target in the medium term. Despite mentioning that if downside risks to inflation were to prevail, a cut in the base rate or an expansion of the asset purchase facility were a possibility, when asked whether he foresaw the next move in rates to be a cut or a hike, Mark Carney clearly stated a hike.
Despite inflation being very low currently, they do not see any need for further stimulus as they see inflation rising back into target range by the end of 2015 as the energy price drop moves out of calculations. Furthermore, with Monetary Policy taking up to two years to fully feed through into inflation, they do not feel a need to respond to the current low inflation, as they believe it will rise back towards targets with current monetary policy and a cut could result in an overshoot of inflation in the medium term.
The outlook for the economy was revised up and recent steps taken by other central banks to increase stimulus, coupled with the fall in Oil prices were viewed as positive for the global economic outlook. This positive and Hawkish outlook had an immediate impact on markets. The Pound caught a bid and within half an hour was up a point on the day, trading at 1.5340. The Gilt and the Short Sterling markets sold off in recognition of the hawkish outlook, with the Short Sterling strip currently indicating that a rate rise might be coming sooner than had been expected prior to the QIR release.