Schroders: Bank of England remains cautious

The Bank of England (BoE) downgraded its forecast for inflation in the near-term in response to falling commodity prices and warned that headline inflation could fall below the 1% lower target band, which would trigger a letter from the Governor to the Chancellor of the Exchequer.

Although the fall in commodity prices is likely to have only a temporary effect on inflation, Carney and the committee appear to be taking a dovish stance. Carney stated that the disinflationary effects could be long lasting, pointing out that downside risks have been crystallising in the shape of weaker growth in Europe and in emerging markets, along with greater geopolitical risks.

For the BoE, medium-term risks towards growth and inflation remain balanced. Carney repeated the Bank's forward guidance of gradual and limited interest rate rises. This will be welcomed by the Chancellor who along with the rest of the government, is about to go into election campaigning mode. However, the UK still has one of the worst fiscal positions in Europe and is running a very high current account deficit by historical standards. Given the need for the next government to restart austerity efforts in the next two years, the Bank may find it more difficult to raise interest rates then than it does now.