For Anna Stupnytska, global economist at Fidelity International, the more balanced tone was appropriate: “This more flexible policy approach, relative to pre-commitment to more easing, seems more reasonable in the environment of heightened uncertainty over the next few months.”
Carney was also clear to highlight that, while the Bank is willing to tolerate a certain amount of inflation above the target level in light of this uncertainty, there are limits to that tolerance.
As Investec expressed it: “this firmer inflation outlook might be beginning to worry the MPC.
“If anything though, we see the risks to the inflation and therefore Bank rate lying somewhat to the upside of the MPC’s view. We see inflation climbing above 3% next year, with a risk that this could persist. The highly regarded National Institute for Economic and Social Research (NIESR) is predicting 4% inflation. Meanwhile, the committee’s (downgraded) forecast for 1½% GDP growth in 2018 looks a little bearish to our taste.”
Balancing that view, however, Axa Investment Management senior economist David Page said: “The MPC’s guidance today was that the outlook was uncertain, current stimulus was appropriate, including to accommodate an overshoot in inflation (subject to monitoring inflation expectations), but that future policy changes would depend on developments.”
“Such an assessment is consistent with our own recent forecast changes to our outlook for monetary policy. We have pushed back the prospect of further stimulus. We consider risks to the downside to the MPC’s latest growth projections and materialisation of these risks is likely to require further stimulus. However, that is not something we consider before H2 2017 (tentatively August) when we expect a further 0.15% rate cut and a further £60bn ($74.2bn, €66.9bn) QE, subject to such a worsening in the growth outlook.”
It is clear that there are a variety of views as to where growth and inflation go from here. But, the conundrum facing investors is well summed up by IG market analyst Joshua Mahoney who wrote on Thursday: “Many of the key tenets that underpinned our understanding of a post referendum world have come crumbling down, with a reversal in monetary policy expectations accompanied by questions over whether article 50 will ever even be implemented.”
And, in that context a balanced and flexible approach even to monetary policy would seem to make sense.
