Divyang Shah, Senior IFR Strategist
Comparing inflation expectation measures during Q1/Q2 with those averaged since 2005 supports the hawks concerns that inflation expectations could become unanchored.
Given that King has been in the minority we could see the hawks maintain their aversion to further stimulus under Carney and a shift won’t be seen without clear downside risks to the economy.
We no longer see the potential for further QE in July/August especially as the BoE is looking more optimistic on the near term growth outlook.
The more significant change to the BoE’s forecast is that inflation is now seen at 2.02% in 2-years compared to 2.32% forecast in February.
The bank still sees inflation above 2% over the next two years but the lower inflation forecasts along with higher GDP forecasts would, on margin suggest less need for further QE.
June futures are around 10 ticks lower at 117.64 than at the start of the press conference.
However, we would caution that the bias in the BoE’s forecasts has been to be overly optimistic on both inflation and growth.
We still think that the uneven nature of growth and a still wide output gap will see the BoE deliver further easing and while the timing of QE is uncertain at the very least Carney will look to flatten the short end of the yield curve with forward guidance.
