The Bank of England now expects inflation to fall more quickly than previously expected, falling below the central bank's 2 per cent target for an extended period.
This forecast indicates the need for interest rates to fall faster than what financial markets are currently pricing in.
According to the bank's latest forecasts, inflation is expected to reach 1.9 percent in two years and 1.6 percent in three years, reflecting a faster decline than previously expected. The MPC stressed that persistent inflation in the UK economy is expected to taper off at a slightly faster rate than previously assumed, despite continued concerns about rising services and wage inflation, which remains at 6 per cent.
The revision in inflation expectations suggests that financial markets may have underestimated the need for the Bank of England to cut interest rates in the coming years. Market expectations for interest rates have fallen by 0.7 percentage points since February, prompting the bank to revise its inflation forecasts accordingly.
Analysts suggest that the bank may need to start cutting interest rates as early as August to match new inflation expectations. Governor Andrew Bailey stressed the possibility of interest rate cuts in the coming quarters to make monetary policy less restrictive, perhaps beyond what is currently reflected in market rates.
Despite the downward revisions to inflation, the bank's forecasts point to an upward revision in economic growth expectations. The UK economy is now expected to expand by 0.5 per cent this year, compared to a previous forecast of 0.25 per cent, and growth is expected to reach 1 per cent next year. In addition, unemployment is expected to rise to 4.9 percent from the current level of 4.2 percent, while earnings are expected to increase by 5.25 percent on average this year, representing an upgrade from the previous forecast of 4 percent. .