Just what did the UK’s Monetary Policy Committee base their decision last week to increase quantitative easing by £25bn on?
The Bank of England’s quarterly Inflation Report.
The MPC raised its forecast for inflation to around 1.6 per cent (from 1.42 per cent) over the next two years – with the rate just exceeding the Bank’s inflation target of 2 per cent by mid-2012. Nevertheless, according to the central bank:
Overall, the Committee judges that, conditioned on the market path for interest rates and the announced programme of asset purchases, the risks of inflation being above or below target are largely balanced by the end of the forecast period. The outlook for inflation in the medium term is somewhat higher than in the August Report, reflecting the stronger projected distribution for GDP growth. Chart 5.7 shows the inflation projection under constant interest rates for the next two years.
And just watch those fan charts of the BoE’s CPI inflation forecasts widen:
By way of contrast, the (August) Inflation Report had the constant rate fan chart of CPI showing red lines between 4 and -0.5 per cent. Is the Bank of England losing its handle on inflation projections?
Or, more to the point, is inflation really starting to rise?
Related links:
£25bn more of QE, the analysts react – FT Alphaville
Sticky inflation, redux – FT Alphaville