The Bank of England has kept its policy rate unchanged at 0.25% and has voted to keep the stock of purchases unchanged by 9-0. This was expected by the market.

The important conundrum for the BoE is if the economy continues to be more resilient than the Banks’ own forecasts, what is its reaction function to above-target inflation?

Within the Quarterly Inflation Report it did indeed improve its outlook for UK GDP. 2017 predictions moved from 1.4% to 2%, coming from both an improvement in household consumption and business investment. At the same time it also moved down its unemployment rate forecast for 2017 from 5.4% to 5%. But it kept its inflation forecast broadly unchanged.

The Bank has managed this by changing its view on how much slack there is still left in the labour market. It does not think wages are picking up fast enough for the level of unemployment that we are at. So it has lowered where it thinks the equilibrium rate of unemployment is – moving this down from 5% to 4.5%.

This gives the Bank of England plenty of room this year to keep interest rates the same even if inflation goes above the target. What will most likely call this into question is if wage growth were to surprise to the upside.

A very interesting throw-away comment from Mr Carney in the press conference: “we are coming to the last seconds of Central Bankers 15 minutes of fame”.

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