Bank of England Projects Inflation Dive as it Hikes by 0.5% – Trustnodes

Active disinflation. That matched the Bank of England’s (BoE) projection which said “we expect inflation to fall rapidly this year.”

A quick dive is expected which sees inflation dropping to 3% in Q1 2024, and then below the 2% target, dropping to near zero as depicted above.

Despite this, the Bank of England still raised 50 basis points to 4%, but indicated “two members prefer to keep the Bank Rate at 3.5%.”

That shows the debate now that Fed chair Jerome Powell also declared we are in “disinflation.”

“It’s nice to see the disinflationary process now underway,” Powell said, pointing out that it’s only just getting started and the Fed’s interest rates are not yet in a “pretty restrictive policy stance.”

However the market is looking ahead with a rate cut clear on the table if inflation is to drop to 3% and even below target.

“In MPC’s central forecast conditioned on the market interest rate path, CPI inflation falls to below the 2% target in the medium term, as increased levels of economic easing are expected to ease domestic inflationary pressures as weakness continues in the assumed path. energy price inflation (Graph 1.5).

In the two year timeframe, CPI inflation has fallen to 1.0% and, in the three year timeframe, inflation is projected to be 0.4%,” said the Bank of England.

Powell also hinted there could be a rate cut as he said if the Fed tightens too much, he has tools available.

“If we feel we have gone too far, and inflation is falling faster than we thought, then we have tools that will address it,” Powell said.

However, he also stated that some economic contraction and some increase in unemployment would not be enough to cut interest rates.

The BoE also seems to be projecting a 3.6% interest rate with 1% inflation, and even 3.3% with almost no inflation.

How politically sustainable that is is unclear as they would effectively deliberately suppress growth for no stated reason.

The debate about whether they should raise further may now also be intensifying once deflation is acknowledged especially if the downward trend in GDP growth over the past year turns into a true recession.

The market expects just one more hike from the Fed of 0.25%, but Powell suggests there could be a few more, though at this point the market sees this decision as temporary, and is therefore trying to weigh the potential for a rate cut later this year.