The inflation outlook, however, has improved significantly, in the CBI’s opinion. The bank now projects average year-2019 inflation at 3.2%, down from 3.6% in the February forecast. The CBI also expects inflation to align with the 2.5% inflation target in mid-2020 and remain close to target thereafter.
In the CBI’s view, the economy is more resilient than before and considerably better equipped to withstand the contraction, not least because of reduced private sector debt and a stronger external position. As a result, the current headwinds are not expected to act as a long-term drag on the economy.
Further rate cuts likely this year
As before, we think it likely that the MPC will lower rates further before the end of this year. This part of the MPC statement is interesting in this respect: “Furthermore, monetary policy has considerable scope to respond to the contraction, particularly if inflation and inflation expectations remain close to the target, as is currently envisioned.”
When asked about this at today’s press conference, the Governor sounded amenable to further rate cuts, provided that short-term economic developments did not turn out substantially more favourable than currently forecast and that inflation expectations remained modest or, preferably, fell even further.
We think it likely that another rate cut — this time by 0.25 percentage points — will come next month, followed by one or two more 0.25-point reductions in the second half of the year. If our forecast materialises, the policy rate will be 3.25-3.50% by the end of the year, the lowest since the current inflation-targeting monetary policy regime was adopted in 2001.