The main risks to our view that low inflation will keep interest rates on hold for longer than markets expect stem from the MPC’s increased focus on spare capacity under phase two of its forward guidance and the strength of the housing market.
But continued low inflation should re-assure the MPC that the economy is not hitting supply constraints, while the Financial Policy Committee should use its macro-prudential tools to take some of the heat out of the housing market, if needed. As a result, interest rates should be able to stay where they are for some time yet.
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