As we widely expected, the BoE's judgment on growth was weaker than in February with growing downside pressures on the recovery. The May Inflation Report provided new insights into the outlook for the U.K. economy and the possible course of the BoE monetary policy.
The BoE sees growth weaker than the projections in February, where growth is pressured by weak construction and household spending as inflation remains high. The weaker outlook for growth is seen temporary as the recovery remains ongoing and will support the expansion.
The BoE still sees inflation fueled by temporary factors from commodities, sterling's depreciation, and the higher VAT this year. Nonetheless, King reiterated that inflation might rally to 5.0% this year and still see risks to the downside for inflation yet the outlook is starting to shift with now roughly equal chances for inflation to be above or below the bank's 2.0% inflation target.
King assured that the MPC will do all that is necessary to bring inflation back to target and that was taken hawkishly by the market, as the roughly equal chances was taken more to the upside by markets as inflation pressures are rising and not easing as we have been seeing in the past period.