The BoE to Highlight Brexit Inflation Today

The BoE to Highlight Brexit Inflation Today
by, David Frank, Economist, Bullish University

The Bank of England (BoE) is holding its monetary policy meeting today and is expected to stand pat on policy but reveal new economic forecasts. They will show the country will overshoot the bank’s two percent target with inflation.

This could put a squeeze on living standards over British families over the coming years. Some economists, are even warning of higher-than-expected inflation that could force the BoE to raise rates as soon as 2017. This would be a major blow for borrowers as well as the broader economy, in general.

The latest consumer price index (CPI) came in at one percent for September. This is half of the target rate but the British Pound has fallen twenty percent against the US Dollar since the United Kingdom voted to leave the European Union on June 23, in a referendum called the Brexit. This is likely to cause a major rise in the cost of many goods and services in the CPI basket over the next coming months.

There is a solid chance that the bank will have to raise its target inflation rate to the highest level in recorded history, since it began forecasting the CPI over a decade ago. The new projected number could be around 2.2 to 2.4 percent in 2017. This is up from the 1.9 projected in August. Inflation forecast for 2018 should rise to around 2.6 percent, up from the forecast of 2.3 percent in August. However, these numbers could come in even higher.

There is data coming out from the National Institute of Economic and Social Research that shows the inflation could jump closer to four percent by the second half of 2017. This is the highest level since 2011. Economists at HSBC feel the inflation number could be closer to 3.7 percent. In either case, this is a drastic increase over the central bank’s two percent target.

Historically, inflation has usually come in higher than the BoE targeted. In 2011 inflation came in at 5.2 percent. This was due to soaring oil prices. However, it is often unusual for a central bank to over shoot its two or three year forecast as it implies the central bank should be taking more of a corrective stance to bring inflation back to its target.

Bank of England Governor Mark Carney, said this week he would stay on until 2019 to help the prime minister negotiate a divorce from the EU said his bank is likely to “tolerate a bit of an overshoot” of its inflation target. This means the BoE should stand pat on interest for the time being and not rush to adjust policy. Adopting a wait and see style, for now.

However, last week, Carney told the House of Lords Economic Affairs Committee “there are limits to the MPC’s willingness to look though an overshoot of inflation” and added that “we are not indifferent to the level of the exchange rate.” This means they could tighten monetary policy should the British Pound continue to slide against the US Dollar.

The BoE in its August Inflation Report, had forecasted economic growth in the third quarter to grow at 0.1 percent. The Monetary Policy Committee had also indicated a rate cut of 25 basis points if the economy continues to slow.

It would seem there are many factors on the mind of the Bank of England, and it is very hard to predict the future of their monetary policy for now.

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