Quarterly growth rates of GDP are likely to ease back a little next year and, over the forecast horizon, growth is likely to remain modest compared to past recoveries. A sustained recovery requires price stability. CPI inflation has fallen back unexpectedly sharply, to 2.2pc in October.
It may tick up slightly in coming months as recently announced utility price increases take effect. But the lower starting point, an appreciation of sterling in recent months, and persistently weak domestic price pressures mean that inflation is projected to be significantly lower than in August.
Under the assumption that Bank Rate follows a path implied by market yields, the 2pc target is reached a full year earlier and inflation is expected to remain persistently a little below the target in the later part of the forecast period.
The MPC assesses the chance of inflation being at or above 2.5pc towards the end of next year to be only around one in three – much lower than in August. The MPC also judges that inflation expectations remain sufficiently well anchored.
A sustained recovery requires confidence that exceptionally stimulative monetary policy will be maintained in the face of weak foreign demand and on-going repair of household, bank and government balance sheets.
Our forward guidance means the MPC will not even consider raising Bank Rate at least until the unemployment rate reaches 7pc. Through that guidance we are giving businesses and households the confidence that interest rates won’t go up until jobs, incomes and spending are recovering at a sustainable pace.
In line with the unexpected strength of demand, the unemployment rate has fallen a little more rapidly than expected in August. That is to be welcomed: 100,000 more people are in work as a result.
The MPC continues to make the conservative assumption that productivity recovers only gradually so that none of the gap relative to its pre-crisis path is closed over the forecast period. As a result, stronger near-term growth causes unemployment to fall faster than expected in August.
Based on the assumption that Bank Rate follows market interest rates, we judge there to be a two in five chance that unemployment will reach the 7pc threshold by the end of next year, and a three in five chance that it will have done so by the end of 2015.
Although the MPC now expects the 7pc threshold to be reached earlier than we did in August, what really matters is what we will learn about the economy along the journey to that threshold. Already, the Bank has revised up its view of the average hours people want to work, which implies somewhat more slack in the labour market than previously assumed.
Our views on productivity will also evolve as the recovery progresses. It is important to remember that the unemployment threshold is a staging post for assessing policy, not a trigger for an automatic increase in Bank Rate.
When the threshold is reached, the MPC will set policy to balance the outlook for inflation against the need to provide continued support to the recovery in output and employment.
As one illustration of the potential trade-offs, compare the MPC’s projections conditioned on the alternative assumption that Bank Rate is held constant until the end of the forecast horizon.
These projections show materially stronger growth – nearly 1pc of GDP – and more rapidly falling unemployment, even though inflation is close to the target by the end of the forecast period. Such policy trade-offs will inform future MPC decisions on the timing of any Bank Rate increase after the threshold is reached.
With the recovery taking hold, our task now is to secure it. The Bank will remain vigilant to risks to financial stability from the housing sector, in particular from rapid increases in house prices and household leverage.
We have a direct line of sight on the housing market across all of our responsibilities, and any potential risks will in the first instance be addressed by the Financial Policy Committee. We will continue the process of repairing the financial sector.
And we will continue to provide exceptional monetary stimulus so that British households and businesses have, for the first time in a long time, the confidence not just that the glass is half full, but that it will be filled.