Last week’s Inflation Report saw the Monetary Policy Committee (MPC) seemingly abandon “Project Fear” in favour of “Project Optimism”. Indeed, the MPC seemed upbeat on growth prospects and relaxed about above-target inflation. But not all members of the MPC are completely unconcerned about the prospect of higher inflation ahead. And there are a significant number of upside risks to the Bank’s new set of “key judgements”.
That said, a sharper pick-up in inflation is unlikely to trouble the MPC too much. And a faster rise in pay growth could be a welcome development. So the chance that the MPC is forced into raising rates soon is probably fairly slim. However, if our forecasts for the economy’s resilience are proved correct, the MPC could still be in a position to start normalising policy at a faster rate than markets expect.
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