BoE: 25pc chance of deflation in Q4 2015
Writing for the new blog Bank Underground, which was launched this morning and will be maintained by the bank’s staff, was Alex Haberis from its monetary assessment and strategy division and Riccardo M Masolo & Kate Reinold from its conjunctural assessments and projections division.
On Tuesday the Office for National Statistics revealed that Consumer Price Index inflation rose to 0.1% in May after turning negative at -0.1% in April.
The trio of staff wrote: “Ordinarily, faced with persistent undershoots of the inflation target – and even deflation – one might expect monetary policy to loosen to stimulate the economy and return inflation to target.
“But with Bank Rate at 0.5%, it’s probably close to its “effective lower bound” (ELB), below which further cuts are either infeasible or undesirable.”
They added: “Unsurprisingly, given how low inflation is at present, the chance that the UK will see negative rates of inflation in the next few quarters is as high as it has been at any point since the financial crisis.
“But an additional factor which could contribute is if one assumed a lack of space for additional monetary loosening by the MPC (Monetary Policy Committee).
“Assuming no limit on the MPC’s ability to loosen in the face of shocks, the probability of deflation in Q4 2015 is around 17%, but that rises to a little under 25% if the ELB is a binding constraint. “
If the Monetary Policy Committee was able to lower the base rate the risk of deflation in Q4 2015 would be around 17%, the staff wrote.
The equivalent for Q4 2016 are 20% if the base rate was treated as the lower bound and 8% if the MPC was able to intervene.
On Bank Underground bank staff will post two to three times a week on subjects including regulation, financial stability, monetary policy, macroeconomics, supervision, banknotes, markets and resolution.
In May last year the bank’s Strategic Plan called for a publication to provide an insight into topical issues from the perspective of staff rather than the MPC.
John Lewis, managing editor of Bank Underground, composed the first post.
He wrote: “Different posts will employ different styles and tools – techy statistical analysis, dipping into the bank’s archives, wonkish theoretical pieces, imagining future challenges, model simulations, big data and anything else we can think of.
“But whatever we write about, we aim to do it in a readable, engaging and accessible way.”
He added: “Authors write in an individual capacity and there is no “house view”.
“Since our analysis feeds into the policy-making process, you can expect to find some posts here that broadly accord with the bank’s official views or provide further underpinning for them.
“But as there are diverse views held by those who work here, you can also expect to read posts which differ from the bank’s official position, external consensus and even other contributors to the blog.”