The BoE sees CPI at around 1.2% in 2 years time according to the May Inflation Report. This is an upward revision from 0.5% in the February Report and is based on market rate assumptions and GBP125 bln in unfunded asset purchases. Based on unchanged repo rate, the central bank forecasts a 1.7% CPI rate in 2 years time. Meanwhile, as expected the GDP estimate was revised down and the central bank now expects GDP to fall by 4.5% at the start of Q2 and look for growth in early 2010 and sees 2.5% growth in 2011. The report sets out that the timing and strength of the recovery to be highly uncertain but that the MPC expects a relatively slow recovery, that it will take time for the bank’s quantitative easing measures to have effect but that there have been some promising signs lately, both in the U.K. and globally, that the pace of economic decline is moderating. Gilt futures have surged on the release of the report, as it suggests that the repo rate might be held low for a longer time than market players currently expect or that there is room for further quantitative easing measures.
Meanwhile, BoE Governor King warns that supply of credit will be restricted for some time, when speaking at the press conference following the release of the May Inflation Report. He also warned that even if there is a recovery in the next 6-12 months, the BoE does not know how sustainable it will be and noted that growth over the next 12 months could just as well be negative as positive. Overall, comments so far highlight that even though there has been some recent encouraging signs that the pace of economic contraction is slowing, recovery is likely to be slow and there are high degrees of uncertainty when it comes to the bank’s forecasts.