MPC willing to tolerate a sharp slowdown

The recent economic news has deepened the dilemma facing the Monetary Policy Committee posed by slowing activity on the one hand and strengthening price pressures on the other. But recent speeches by various MPC members suggest that the Committee is willing to tolerate a fairly sharp downturn in activity in order to keep inflation at bay. As such, the MPC is likely to continue to cut interest rates only gradually, with rates likely to remain on hold until May. Nonetheless, we still think that interest rates will ultimately fall further than most other forecasters currently expect.