Bank of England suggests MPC still in no hurry to raise rates

Bank of England Inflation Report for May supports financial markets' view that the Monetary Policy Committee (MPC) is in no rush to raise interest rates. However, the analyst does not think that the Committee's increased pessimism about the UK's supply potential is justified. 
The Committee continues to think that inflation could turn negative in the near term. As before, though, the MPC does not seem too concerned about the threat of a prolonged period of deflation. In his Open Letter to the Chancellor also published today the Governor said "in the absence of further falls in commodity prices, inflation rates close to zero are unlikely to endure for very long." 
Admittedly, inflation is now expected to pick up a touch more sharply at the turn of the year when energy price effects drop out, presumably reflecting the MPC's view that the pass-through of sterling's rise has been a bit quicker than it anticipated. 
But inflation is still expected to level out at its 2% target at the two year policy horizon. This suggests that the MPC sees the market expectations on which the forecast is based - for interest rates to start rising in the middle of next year and reach just 1.3% by the end of 2017 - as broadly correct. Interest rates is likely to end 2016 at just 1% and 2017 at 1.5%, notes Capital Economics. 
The Committee revised down its growth forecasts fairly significantly. Its previous forecasts for GDP growth of 2.9% this year and next were revised down to 2.6% in 2015 and 2.7% in 2016. 2017's forecast has been revised down from 2.7% to 2.5%. 
Note that although it expects an upward revision to the initial estimate of a 0.3% rise in GDP in Q1, it thinks that the number will end up at a still modest 0.5%. Normally this might all be expected to push down the inflation forecast, but the Committee has also become more bearish about the outlook for productivity growth. 
In other words, the weaker demand outlook is offset by a weaker outlook for supply and the Committee still expects the 0.5% of GDP of slack that it thinks exists to be used up over the forecast period.