Speaking at the EBEA Teachers and Students Conference in London, McCafferty said that the MPC estimate the remaining slack of ½% of GDP to be absorbed within the next year. As a result, wage growth is expected to pick up, to 4% by the end of 2016, returning inflation to its target by the end of 2017.
He added that inflation will remain around zero for a few months, until the temporary impact from oil, food and the exchange rate fades as we move into next year.
In May, CPI fell 0.1% in the year to April 2015 - the first time the CPI has fallen over the year since official records began in 1996.
McCafferty continued:
"With the economy starting to normalise, with a forecast of a modest overshoot in inflation by early 2018 in our May central forecast, the key question facing my colleagues and I on the MPC is when it will become appropriate to begin the process of moving policy away from the extreme lows of recent years.
"Bank Rate has now been unchanged at 0.5% for over six years and the stock of purchased assets has been held at £375 billion under the quantitative easing programme since July 2012. That monetary policy has been so accommodative for so long is an indication of the dislocation sustained by the economy as a result of the financial crisis. However, with some of the headwinds to the economy from that crisis now starting to fade, we are approaching the time when monetary policy will need to begin its journey back to more ‘normal’ settings."
Financial markets currently expect the MPC to start the process in the summer of next year. In OIS markets, a first rate rise of 25bp is fully priced in by June, while surveys of professional forecasters have this date a little earlier, in the first quarter of 2016. McCafferty has previously voted to increase Bank Rate by 25 basis points.
McCafferty concluded that the MPC’s main policy tool, Bank Rate, needs to be gradually altered so that the MPC can better judge the effects that it is having. He addeed that a gradual tightening of monetary policy will also better allow businesses, investors and consumers to adapt, but that legacies from the global financial crisis will likely require Bank Rate to remain lower than historical levels for some time.
