In a word: dovish.  The Bank is robustly sticking to its projections of a quite steep fall in inflation after the predictable spike to April. This chart is key:

Ed Conway has a long summary of the post report press briefing.   A choice paragraph to end it with:

Co-operating with the Conservatives Finally, he was asked a couple of times about comments from the Conservatives that they would “co-operate with the Bank” when it came to their fiscal plans. In remarks which might be taken as a slap-down at the Tories for comments which apparently undermine the Bank’s independence, he said a couple of times: “I don’t know what this proposal means… You’ll have to ask them.”

But what confuses me more is this:

The special liquidity scheme “We have absolutely no intention of extending it. It is the most generous scheme in the world. It’s more than enough. We are working with the FSA and individual banks to ensure they have schedules for refunding this money.

Another key feature of the report is the continuing concerns about credit and liquidity going forward.   For example, on p16:

Overall, funding remains a significant concern for many lenders. In the November 2009 Systemic Risk Survey, around a third of market participants reported that funding and liquidity problems were a key risk to the UK financial system, and that such problems were among the most challenging to manage.

In which case why announce a policy that is less supportive of liquidity? As the FT’s blog points out, credit conditions are getting tighter for ordinary households, leading Emma Saunders to worry aloud about “the effectiveness of central bank monetary policy in a context of widening spreads”.

The other big take-out is that there might be MORE QE, which buoyed the Gilt market.  The IoD certainly thinks or hopes so.

I am a third through it: the rest after a 16k erg. You can read it here.


6 thoughts on “Inflation report updates

  1. A 16k erg? My god.

    Anyway, Do I read that chart as the bank expects a non trivial chance of deflation from 2011 to 2013? Presumably that would be if were in fact in a double dip? Am I unreasonably irrational to see that as more scary than the main trendline, given that there seems to be no chance of further fiscal stimulus, come what may?

    Any guidance on what we do if we get stuck in a deflation trap again and we’re cutting public spending while investment remains low?

    1. Going through the question marks one by one:

      erg – yeah, my hands are now ****ed, though I failed: trying to do 15.95k in 1hr, but lost heart after 40 mins.

      Yeah- non trivial. In fact, they have revised their expectations of CPI down, despite the hyperinflationist hyperventilating nonsense from drama queens like Liam Halligan over the last set of figures. Yeah, that must surely be a double dip. And yeah that is way more scary, because the ktty is running out. In fact, it isnot, but the political will is running out. Rather embarassingly, you have anticipated the punchline of my much longer piece to come out:

      “The most worrying risk is that the economy stutters again, and the apparent failure of QE leaves politicians believing that they have run out of methods for boosting the economy. Patience with QE could start to wear thin . . . A likely rise in inflation owing to predictable base effects might reawaken the interests of those who want higher rate, holders of nominal savings or pensions above all. The asset-poor may begin to notice its skewed effects. Politicians will quite rightly start to ask whether QE has shifted too much power towards the Bank. But giving up on monetary easing at the same time as fiscal policy becomes tight might plunge the UK into a double-dip recession. This would be a far worse situation than 2008 – instead of entering recession with a deficit of 3-5 per cent and debt levels of 40 per cent, these figures could be 13 per cent and 70 per cent respectively”

      We have to start directing the monetary stimulus to where it gets spent, rather than just where it makes life easier for City gents like me. As I put it in my embarassing doggerel, “. . . . . Why do this money printing
      just to help those lucky sorts that hardly need such extra minting?”

      Stage 1: convince the opinion formers. First on the list, Mr Sen. Second, Merv King.

  2. Hope you don’t mind me repeating something from a post to an earlier piece; Macro Man has a labour market indicator for BOE policy still suggests an optimal nominal base rate that is negative (-2%) which you can find at

    Add to this, the still subdued money supply situation and we have compelling evidence that more action is required.

    Funding the PSBR through bank lending is more direct than QE and operates directly on both the money supply and demand. If reducing the PSBR to reduce bank lending to the public sector was the right policy for the late ‘70s (using the IMF’s DCE equation) then the reverse was and is the wiser thing to do when the Bank selected QE.

    This dire situation places a huge responsibility on politicians to grasp the economics and provide strong leadership to overcome the difficulties you describe of people impatient to fight inflation when deflation remains the foe and to cut government spending when this remains the key element of demand.

    1. Agree 90%. I would use the printed money to target credit problems though, and help finance national infrastructure.

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