MPC still too cautious on productivity

Once again, the Monetary Policy Committee (MPC) surprised many by the extent of its downward revision to the inflation forecast in its latest Inflation Report and the Governor poured cold water on speculation that interest rates would rise before the end of the year.

But in our view, the Committee didn’t go far enough in revising down its inflation projection. Its forecast is still based on some overly pessimistic assumptions for productivity growth which seem incompatible with its view that business investment will surge.