Dissecting the MPC’s UK inflation fixation

High inflation in the UK and concerns about the effect of a tight jobs market on wages will likely push the MPC to raise rates to 1.25% by the end of 2022. But considering the key role played by global energy prices in pushing up inflation, we think this could turn out to be a damaging overreaction.

What you will learn:

• The BoE’s latest growth forecast far from signals an unsustainable boom.
• In reconciling these observations with the committee’s hawkishness, a lack of faith in its own inflation forecast is one possibility.
• Bank Rate sitting well below the MPC’s estimate of the neutral rate could be another motivation.