The key takeaways from today’s Bank of England MPC Decision/Inflation report are:
- No change in interest rates.
- Short term the economy is going to do better than they expected, but long term worse.
- Inflation will reach 2.75% in 2018 but oil, food and clothing prices will go up by even more.
- Wages will not go up at the same rate as prices meaning that households will feel the squeeze.
The Bank has essentially decided to do nothing because they misjudged how the economy would fare in the short term. It fared much better last quarter than they had initially expected it to do.
In August they had predicted that the economy would grow by only 0.1% between July and September.
But last week the ONS said that GDP growth was 0.5% in the same period. A figure the Bank doesn’t dispute [on other occasions it has said that this figure might need revising]. This is essentially because consumers have kept calm and carried on spending and because the housing market hasn’t had the initial shock they anticipated back in August.
But looking ahead the Bank paints a gloomier picture. They have revised downwards their GDP estimate for 2018 from their assessment in August.
They are clearly concerned about the impact of the weak value of the pound on inflation. Although they predict that inflation overall will go up to 2.75% in 2018, they believe that consumer prices will rise by around 3.5% within the next three or four years.
And they acknowledge that the price of imports such as food and clothing has already gone up by 6 ½ percent over the past year. I expect food prices and energy prices to go up by even more than that given the new OPEC plans to cut oil production and that food industry experts tell me that we can expect a hike in food prices of up to 8% as early as next year.
Important to note is that they don’t expect wages to rise at the same rate of inflation which means that we’ll feel the squeeze!
Important to note too is that the pound has plummeted by much more than the Bank had initially expected - it has fallen by a whopping 20% in the last year [16% since the referendum vote of which almost 5% came after the Conservative Party Conference when markets realised that we are likely to be facing a “harder” Brexit than they had initially expected].
And the Bank makes clear today that the depreciation in sterling is going to have a negative effect on growth - because of the impact it will have on consumer spending (because import prices will go up) and also on businesses’ profits.
Also weighing on their minds is that the uncertainty over future EU trading relationship is likely to stymie investment, as even exporters who might have benefited otherwise from the weakness in sterling may hold back from investing until they have more clarity about what lies ahead.
Of course today’s news that the decision to invoke Article 50 will be put to vote in parliament would completely scupper the Bank’s forecasts if it meant that that we did not actually leave the EU. But we’re very far from that being the case.