Inflation was judged likely to remain close to zero in the very near term, reflecting past falls in energy, food and other import prices and some continued drag from domestic slack.
Conditional on the market path for Bank Rate, CPI inflation was judged likely to return to the 2% target by the two-year point and to move slightly above the target in the third year of the forecast period.
On the downside, the factors pulling inflation down currently could prove more persistent than expected or a period of low inflation could be reflected in weaker wage pressures.
Taking into account the central projection and the risks around it, the MPC’s best collective judgement was that inflation was as likely to be above as below the 2% target in early 2017, with the likelihood of inflation being above the target rising a little further into 2018. That outlook was very similar to the projection in February, despite a higher assumed path for Bank Rate and higher exchange rate, as the resultant downward revisions to the demand outlook had been offset by a downward revision to the path for productivity.
The Committee judged that GDP growth would pick up in Q2 to close to its historical average rate, supported by the boost to real incomes from the fall in food, energy and other import prices, and would continue to grow at, or just a little below, historical average rates throughout the forecast period.
Over the past three months, CPI inflation had evolved in line with the Committee’s February Inflation Report projection. While it was more likely than not that inflation would briefly turn slightly negative in the near term, the MPC’s best collective judgment was that this weakness would prove temporary. Around three quarters of the deviation of inflation from target could be accounted for by unusually low contributions from movements in energy, food and other goods prices. Although it was likely that low inflation would necessitate further open letters during the course of the year, the Committee’s central view continued to be that, in the absence of further falls in commodity prices, inflation rates close to zero were unlikely to endure for very long. The Committee’s central expectation was that CPI inflation would pick up notably towards the end of the year.
In light of that aim, and the Committee’s latest set of economic projections, all Committee members agreed that it was appropriate to leave the stance of monetary policy unchanged at this meeting. For two members, the immediate policy decision remained finely balanced between voting to hold or raise Bank Rate. While there was a range of views over the most likely future path for Bank Rate, all members agreed that it was more likely than not that Bank Rate would rise over the three-year forecast period.
Nick Dixon, Investment Director at Aegon UK, commented:
“Negative inflation is putting money back into people’s pockets and should do no harm for consumer confidence. The UK economy is heading in the right direction, but muted wage growth and a stable pound sterling make the prospect of a rate rise highly unlikely during 2015.”
