Summary
The Bank of England's May Inflation Report failed to shed any further light on the direction of the next interest rate move. The Bank's forecast showing inflation hitting its 2% target in two years time, on the basis of market expectations of rising interest rates, suggests the next move may be up. But at the same time, the Bank revised down their profile for output growth. This would imply greater spare capacity in the economy than they had previously assumed and thus a role for lower interest rates, as the direct effects of energy price rises unwind. The MPC consider the risks to be broadly balanced, and this article outlines the main upside and downside risks to inflation. We conclude that, in the absence of further energy price shocks, inflation could undershoot the 2% target during 2007. Therefore, at present, we still believe the current data justify a further interest rate cut by the end of the year. But with the MPC signalling that rates are not about change any time soon, we are keeping a close eye on the latest outturns and will review our forecast next month.
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The Next Interest Rate Move Will Be...?
Upside risks from the housing market...
Market futures currently show short-term interest rates rising to 5% by the end of 2006, with confidence buoyed by recent strong survey readings and data outturns. One key concern for the MPC is the apparent re-acceleration in house prices. The Halifax house price index showed prices rising by 2% on the month in April and annual inflation reaching 8%. Mortgage lending has...See the full content of this document
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