Commenting on the Bank of England’s quarterly inflation report issued today, KPMG Chief Economist, Andrew Smith, said:
“The latest Inflation Report confirms that good news comes in threes, with the outlook for jobs, output and inflation all improving at the same time.
“Since its previous forecast – only three months ago – the Bank of England has sharply raised growth forecasts for this year and next, revised inflation projections down and now expects unemployment to fall further and faster. While the positive data of the past few months meant these revisions were largely expected, they are welcome all the same.
“Unusually though, it is not growth or inflation, but the unemployment forecast, that is receiving the most attention. And the good news, that the rate is now projected to fall below 7% much sooner, is in danger of being overshadowed by the markets’ reading of the implications for interest rates. The Governor was once again keen to emphasise that getting unemployment back down to 7% is a threshold for re-evaluation, and not an automatic trigger for a rate rise, but the markets may remain sceptical.
“In introducing forward guidance the Monetary Policy Committee always risked creating a rod for its own back. While the Bank has stressed that it is intended to clarify the circumstances under which policy might change, rather than the exact timing, tweaking it too often could undermine its usefulness.
“Although even optimists have been surprised by how strong 2013 has been, the recovery is not yet secured and a number of headwinds could still knock it off-course. And for all the excitement, almost six years on output is still below its previous peak. So while the economy appears close to reaching ‘escape velocity’ where growth feeds into confidence which feeds back into growth, creating a virtuous circle, the Bank has ruled out an early rate rise or reversal of quantitative easing.”
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Margot Cowhig, KPMG Corporate Communications
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Notes to editors.
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with over 12,000 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2012. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 156 countries and have 152,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.