Bank of England slashes inflation forecast for 2015 but increases economic growth expectations

6th August 2015


The Bank of England expects inflation to hit its 2% target in two years’ time but has slashed its forecast for 2015, expecting it to average 0.3% down from May’s 0.6% prediction.

The latest official statistics showed that the cost of living as measured by the consumer prices index (CPI) stood at 0% in June.

On Thursday the Bank for the very first time released its monthly interest rate decision, the minutes of the Bank’s Monetary Policy Committee (MPC) meeting, as well as its Quarterly Inflation Report simultaneously.  The day was dubbed Super Thursday on the back of the Bank’s move to publish all three together.

In terms of interest rates the MPC voted 8 to 1 to hold interest rates at 0.5% for another month.

Commenting on the inflation figures, Bank of England governor Mark Carney said:  “As set out in my latest in an expected sequence of open letters to the Chancellor, around three quarters of the deviation of inflation from the 2% target reflects unusually low contributions from energy, food, and other imported goods prices. The remaining part of the undershoot reflects the past weakness of domestic cost growth, and wages in particular. The combined weakness in domestic costs and imported goods prices is evident in subdued core inflation, which is currently around 1%.”

The Bank however increased its economic growth forecasts for 2015 from 2.5% to 2.8%. Unchanged from its previous projection, it still expects growth to ease back to 2.6% next year.

Howard Archer, chief UK and European economist at IHS Global Insight said: “Growth is seen driven by consumer spending, supported by improved purchasing power and some reduction in savings rates. The bank does not expect there to be a building-up of debt. Additionally, business investment is seen improving. However, export growth is seen limited by sterling’s strength.”

Nick Gartside, international chief investment officer for fixed income at JP Morgan Asset Management said: “The key we think is the inflation outlook.  The Bank of England thinks inflation will average 0.3% in 2015 versus 0.6% expected in May, although it is expected to reach 2.0% in two years’ time and the BoE pointed out that real wage pressures are building.  With such a benign inflationary outlook rate hikes in 2015 look unlikely which was reinforced by the 8-1 vote in favour of keeping interest rates on hold.”

In July Carney hinted that rates could rise at “around the turn of this year” if the UK economic recovery stayed on track. Archer however does not expect to see a hike until the first quarter of 2016. He said: “Further out, we see interest rates only rising gradually to 1.25% by the end of 2016, 2.0% by the end of 2017 and 2.50% by the end of 2018.2

He said: “The strong message coming from the central bank is that interest rate hikes will be both gradual and limited.”

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