–Mean Forecast Shows CPI At 1.56% 2 Years Out
–Unchanged Rate Forecast Shows CPI At 1.84%; 2.04% On Mean

LONDON (MNI) – The precise numerical forecasts underpinning the
Bank of England’s May Inflation Report confirm a wide undershoot of the
2% inflation target in 2 years time.

Based on market interest rates expectations and unchanged
quantitative easing of stg200 billion, the BOE has produced a modal
forecast for CPI inflation of 1.36% in 2 years time. Reflecting the
‘range of views’ within the MPC on the risks to the inflation outlook,
and the skew of inflation risks to the upside, the mean forecast for CPI
in 2 years time is significantly higher at 1.56%.

Even on flat rates and stg200 billion QE inflation is still clearly
below the 2% target in 2 years time at 1.84% and is only marginally
above it on the BOE’s mean forecast at 2.04%.

The Inflation Report noted that there was high uncertainty on the
pace and extent of the forecast decline in inflation.

That uncertainty will have been exacerbated further by news that
CPI came in at 3.7% on an annual basis in April, hinting that the BOE
forecast may again turn out to be too low for the first half of 2010.
Widespread speculation that the new government could announce a rise in
Value Added Tax in its June 22 Budget would give another boost to
inflation.

The parameters are generally released a week after the BOE’s
quarterly Inflation Reports. The Bank is reluctant to release the
precise data underlying its CPI and GDP fanchart projections as it
prefers markets and commentators to look at the general trajectory of
the forecasts as well as the balance of risks.

The Bank’s GDP forecast based on market rates and stg200 billion QE
shows growth running at an annual 2.43% by Q3 this year and at 3.51% by
Q3 2011. In Q2 2012 UK GDP is forecast to be running at an annual rate
of 3.64%. On unchanged rates and unchanged QE GDP is forecast to be well
above 4% in 2 years time.

The Bank’s view of market rate expectations shows rates on a gently
rising profile as of the end of this year, climbing to 0.8% in Q1 2011
and 1.7% by the end of next year and 2.3% by Q2 2012.

The following table shows the key projections.

CPI inflation projections based on market rates, stg200bn QE:

10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2
Mode 3.30 2.54 2.28 1.70 1.40 1.39 1.31 1.32 1.36
Mean 3.35 2.60 2.36 1.79 1.50 1.51 1.46 1.50 1.56

CPI inflation projections based on flat rates, stg200bn QE:

10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q1
Mode 3.30 2.54 2.28 1.70 1.43 1.48 1.49 1.64 1.84
Mean 3.35 2.60 2.36 1.80 1.53 1.60 1.65 1.82 2.04

GDP growth projections based on market rates, stg200bn QE

10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2
Mode 1.46 2.43 2.77 3.19 3.36 3.51 3.51 3.59 3.64
Mean 1.36 2.23 2.47 2.79 2.86 2.96 2.91 2.94 2.94

GDP growth projections based on flat rates, stg200bn QE:

10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2
Mode 1.46 2.43 2.80 3.29 3.57 3.83 3.92 4.04 4.10
Mean 1.36 2.23 2.50 2.89 3.07 3.28 3.32 3.39 3.40

–London newsroom: 44 20 7634 1624; email: drobinson@marketnews.com

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