BoE Preview: trade-off in tighter conditions
- The BoE’s annual supply-side stock take is likely to reveal spare capacity has now been utilised, placing a little upside pressure on inflation and making inflation overshoots less tolerable. Fiscal policy changes also add about 0.1pp to inflation.- Sterling strength is dominating other market moves and lowering the BoE’s 2yr forward forecast by about 0.2pp. Higher rates subtract an additional 6bp at this horizon. Altogether, the BoE’s 2yr inflation forecast will probably fall toward 2%.
- With slack and excess inflation reduced, the policy trade-off is still broadly balanced, so a significant new hawkish shock is not yet needed. A May hike is already priced as a real risk, and I still expect the MPC to follow through on that.
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