NIESR: ‘A Welcome Decision from the MPC, but Risks Remain’
- The November Inflation Report revises up the Bank’s forecast of inflation to 2.7 per cent in 2017 Q4 and 2.7 per cent in 2018 Q4.
- However, the stance of policy is unchanged and the MPC’s communication clearly suggests they are willing to look-through this period of inflation.
- We welcome this decision, as a tightening of policy to offset the temporary exchange rate shock would adversely affect demand in the economy and could lead to a deflation once temporary factors wash out.
- However, there are significant risks of tolerating a prolonged period of above target inflation.
James Warren, Research Fellow at NIESR said “The MPC’s decision to hold the stance of policy unchanged is, on balance, the right one, especially considering the reiteration that policy stands ready to respond, in either direction, to changes to the economic outlook. The period of heightened near term inflation will likely erode the purchasing power of many households over the next year or so, leaving them less well off in real terms. However, under the MPC’s own forecast, inflation remains significantly above target in the medium term. Such a prolonged period of above target inflation risks unhinging inflation expectations, especially at a time of acute uncertainty.”
Note: NIESR’s latest quarterly forecast (published 2nd November 2016) projects GDP growth of 2 per cent per annum in 2016 and 1.4 per cent in 2017 (see here for the associated press release).
Related information from the Bank of England can be found at: Inflation Report, November 2016
For further information and to arrange interviews, please contact the NIESR Press Office:
Paola Buonadonna on 020 7654 1923 / firstname.lastname@example.org
NIESR aims to promote, through quantitative and qualitative research, a deeper understanding of the interaction of economic and social forces that affect people's lives, and the ways in which policies can improve them.
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