BoE to cut near-term inflation forecasts

Lower oil prices and higher sterling will likely lead to a cut in the BoE's very near-term inflation forecasts. Assuming oil prices stay where they are, inflation could bobble around 0.1% until October. That probably rules out a November hike. 

The BoE is expected to leave its two-year ahead forecast little changed at 2%, as the near-term temporary drags on inflation fade and stronger wages feed through. The three-year forecast is expected to remain a touch above the BoE's 2% inflation target (at 2.1%). In other words, inflation should remain lower for longer, but then follow a steeper path than the BoE thought back in May. 

The central bank could cut downside growth and inflation risks from its May forecasts, which may offset some of the news from higher sterling and lower oil prices. 

"We look for the BoE to publish headline inflation forecasts of: 0.4% for end-2015 (from 0.6%), 1.5% for end- 2016 (from 1.6%) and 2.1% for end-2017 (unchanged)," notes BofA Merrill Lynch.

On the interest rate decision, a 7-2 vote is expected to keep interest rates on hold. David Miles is not expected to have called for a hike, but it would mean little even if he does. Miles will be replaced by Gertjan Vlieghe at the end of the month, who has said nothing publicly about the UK for some years. A more hawkish signal to watch out for would be one of the other Committee members-Kristin Forbes perhaps-voting for a hike. 

Aside from the forecast changes, the key points to look for the Thursday are on the BoE's strategy. It may not say anything here, but any titbits to emerge will be key. First, to what extent is it prepared to look through sterling's and oil's effects on inflation? To date, that has been an easy question, because very low wage growth pointed to significant slack. It is a more pressing issue now. To what extent is it prepared to tolerate modest forecast inflation overshoots in years 2 and 3? As it rolls the forecast forward each quarter, its currently above target forecasts for year 3 will, all else equal, shift to the key two-year point. Beyond that, what does the BoE mean by gradual rate hikes? If it believes rates need to be at a neutral rate of about 2.5% by early 2018 that implies hikes of about 100bp every twelve months if it starts in early 2016.