Central Bank Outlook: BoE Worries on Supply Side More Evident?

Posted May 16, 2012 by CLeahey

[private]

• The May BoE Inflation Report provided some rationale for the MPC decision this month not to extend its asset purchases. Admittedly, the Report seemingly leaves open scope for a further increase in asset purchases at some juncture, especially as the projections cannot fully incorporate the risks stemming from what could be disorderly developments in the Eurozone, at least over and beyond those already evident in funding costs and confidence.
• While the Report still sees a continued undershoot of the 2% target (at least as sizeable as that seen in the February Report), the BoE still considers the risks to the inflation projections to be balanced rather than skewed to the downside as was the case through 2011.
• Regardless, the clear worries and uncertainty regarding the supply side of the economy implies that some MPC members may not yet be convinced enough of the disinflationary pressures implicit in this outlook.
• Indeed, there may have been clear divisions in the vote this month not to extend asset purchases; a fuller picture of central bank thinking may come from the minutes to the May MPC meeting due next Wednesday, possibly revealing whether some members are wary that asset purchases may actually have become counter-productive.

 Central Bank Outlook BoE 051612[/private]