Policymakers expect the inflation to remain below 1 percent this year. GDP growth forecasts were lowered to 2.2 percent for 2016 from an earlier 2.5 percent estimate. Growth for 2017 was also downgraded to 2.4 percent from 2.7 percent.
Excerpts from Monetary policy summary, February 2016:
The MPC has revised down its estimate of the level of potential supply broadly in line with the lower level of demand. Resilient private domestic demand growth is expected to produce sufficient momentum to eliminate the limited margin of spare capacity during the course of this year. However, wage growth has been weaker than anticipated and labour costs are expected to rise a little less quickly than thought at the time of the November Inflation Report, contributing to a slower recovery in inflation. In part that reflects the MPC’s expectation that low realised inflation will continue to moderate the increase in wage pressure in the near term. The mechanical return to higher rates of inflation as past falls in energy prices drop from the annual comparison, supported by the recent fall in the sterling exchange rate and some additional stimulus from lower market interest rates, should in time reverse this effect and support wage gains. The MPC judges that inflation expectations remain well anchored, though it remains watchful for signs that low inflation is having more persistent second-round effects on wages.
The scale of recent commodity price falls means that CPI inflation is likely to remain below 1% until the end of the year. As the drags from energy and other imported goods unwind, however, domestic cost pressures are projected to build up sufficiently such that, conditioned on the path for Bank Rate implied by market interest rates, CPI inflation is likely to exceed the 2% target slightly at the two-year point and then rise further above it. This central projection for inflation is modestly below that of three months ago for much of the forecast period but broadly similar by the end. The MPC judges the risks to the central projection to be skewed a little to the downside in the near term, reflecting the possibility of greater persistence of low inflation.
There are significant judgements underlying these projections and a range of views among MPC members about the balance of risks to inflation relative to the best collective judgement presented in the February Inflation Report. At its meeting ending on 3 February, the MPC judged it appropriate to leave the stance of monetary policy unchanged. The MPC judges it more likely than not that Bank Rate will need to increase over the forecast period to ensure inflation remains likely to return to the target in a sustainable fashion.
All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles. This guidance is an expectation, not a promise. The actual path Bank Rate will follow over the next few years will depend on the economic circumstances.