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In the United Kingdom, a recovery appears to be taking hold. But the legacy of adjustment and repair left by the financial crisis means that the recovery is likely to remain weak by historical standards. CPI inflation rose to 2.9% in June and looks set to remain around that rate in the near term.
Against that backdrop, the Committee has provided some explicit guidance regarding the future conduct of monetary policy. The MPC intends at a minimum to maintain the present highly stimulative stance of monetary policy until economic slack has been substantially reduced, provided this does not entail material risks to price stability or financial stability. In the Committee`s view, a sustained recovery in both demand and supply appears likely.
The outlook for growth is stronger than in May, mainly reflecting a marked improvement in business and consumer sentiment. This stronger demand is assumed to be largely matched by an increase in effective supply capacity, such that the outlook for inflation is similar to May, with inflation expected to fall back to around the 2% target over the forecast period. The policy decision.
A recovery appears to be under way, although its strength and sustainability remain unclear. Inflation remains well above the target, but seems likely to fall back to around the 2% target in the latter half of the forecast period. The exceptional weakness in productivity means that there is considerable uncertainty about the supply capacity of the economy as demand recovers.
As a result, the trade-off between the horizon over which inflation returns to the target and the speed with which output and employment recover is unusually uncertain. Misjudging that trade-off could have significant costs in the medium term. In these unprecedented circumstances, explicit policy guidance can enhance the effectiveness of monetary stimulus in three ways.
It provides greater clarity regarding the MPC`s view of the appropriate trade-off between the speed with which inflation is returned to the target and the support given to the recovery. It reduces uncertainty about the future path of monetary policy as the economy recovers. And it delivers a robust framework within which the MPC can explore the scope for economic expansion without putting price stability and financial stability at risk.
At its August meeting, in the light of both the economic outlook and these considerations, the MPC voted to maintain Bank Rate at 0.5% and the stock of asset purchases at 375 billion.
The full report can be found here.
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