"Inflation is now expected to increase to 2.8% in the first half of 2018, before falling back gradually to 2.4% in three years’ time."
The Bank now expects GDP growth of 1.6% in 2018 and 1.7% in 2019, both up by 0.1% from the November report.
Overall, in the central projection that leaves the level of GDP around 1% higher in three years’ time than projected in November.
The Committee said the upgraded outlook reflects the fiscal stimulus announced in the Autumn Statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households.
Domestic demand and consumer spending have been stronger than expected over the past few months, but continued moderation in pay growth and higher import prices following sterling’s depreciation are likely to mean materially weaker income growth and lower household spending, according to the Report.
A continuation of weaker sterling is is expected to boost consumer prices and cause inflation to overshoot the 2% target.
The Committee says this effect is already becoming evident in the data - CPI inflation rose to 1.6% in December and the MPC says "further substantial increases are very likely over the coming months". The Bank predicts CPI inflation to return to the 2% target this month.
Inflation is now expected to increase to 2.8% in the first half of 2018, before falling back gradually to 2.4% in three years’ time. Inflation is judged likely to return to close to the target over the subsequent year.
However despite the increased growth forecasts, near term Bank Rate hikes are unlikely.
The Bank's current market path for Bank Rate shows it rising to just under 0.75% by early 2020. The MPC then projects CPI inflation to fall back gradually from the middle of 2018. Continued pass-through of higher import prices means, however, that inflation is projected to remain somewhat above the 2% target at the end of the Committee’s three-year forecast period.
Shilen Shah, Bond Strategist at Investec Wealth & Investment, commented: “The resilience of the UK consumer has led the BoE to further increase its GDP forecast 2016 to 2% to 1.4%. However, there are hints that the tolerance of a number of MPC members to higher inflation is close to their limit. The BoE’s also suggested that slack in the economy may be somewhat larger than previous thought, however inflation is still thought to peak at 2.8% in 2Q 2018. If the strength in the economy continues over the coming quarters, despite the uncertainty created by Brexit, the MPC patience may be further strained.”
“In the US, the Fed kept interest rates unchanged at its first meeting of the year as the central bank awaits the policy implication of the new Trump administration. The Fed did however note that inflation pressures are increasing suggesting that the market’s stance in relation to the pace of interest rate increases in 2017 may be too cautious.”
