Bank of England moving closer to 2% inflation target

01 September 2015

  • One-in-10 chance of deflation in 2016 for the UK
  • Chances of hitting 2% inflation one-in-two in 2016
  • 45% probability of GDP growth exceeding 3% in 2016
  • UK GDP growth increasingly likely to return to more normal 

The Warwick Business School Forecasting System (WBSFS) has revised upwards the probability that inflation will return to around its two per cent target level in 2016 following the UK's revised second quarter remaining at 0.7 per cent growth.

The WBSFS now forecasts there is a one-in-two chance the target of around two per cent will be achieved in 2016, as it calcultaes only a one-in-10 chance of deflation in 2016 rather than the one-in-two chance forecast a quarter ago.

But that means there still remains about a one-in-two chance of a breach of the inflation target in 2016. And there is close to a one-in-three chance of deflation for 2015 as a whole.

Instead of using a single forecasting model or relying on the judgement of the Bank of England’s Monetary Policy Committee the WBSFS combines five state-of-the-art econometric models to produce judgement-free macroeconomic forecasts for UK GDP growth and CPI inflation. These forecasts are updated each quarter to reflect the latest data.

By using model averaging, following well-established methods in statistics, meteorology and economics, the WBSFS takes a weighted combination of each models’ forecasts, where higher weights are awarded to models which show the better recent forecasting performance. The WBSFS quantifies and communicates the forecast uncertainties by producing probabilistic forecasts. 

WBSFS forecasts for August 2015

 

Commenting on the latest Warwick Business School forecasts, timed to coincide with publication of the latest GDP data from the ONS, Professor Ana Galvao, of the Economic Modelling and Forecasting (EMF) Group at WBS, said: “The deflationary risks to the UK economy have clearly moderated over the last quarter. There is now close to a one-in-three rather than a four-in-five chance that the UK will experience deflation through 2015. And there is less than a 12% chance of deflation in 2016.“

Professor Anthony Garratt, of the EMF Group at WBS, said: “Despite the recent market turmoil, economic prospects for 2015 and 2016 remain strong, with a 45% probability of GDP growth exceeding 3% in 2016.”

Professor James Mitchell, of the EMF Group at WBS, added “Our latest forecasts point to increased consensus about economic prospects across economic forecasters, including the Bank of England, with UK GDP growth and now inflation too increasingly likely to return to more normal values.” 

Professor James Mitchell teaches Economics of the Business Environment on the Warwick Global Energy MBA and Managing in a New World on the Warwick MBA by full-time study

Professor Anthony Garratt teaches Business Economics on Warwick Business School's Undergraduate programme, Economics for Management and Business on the MSc Management course and The Economics of Overseas Business Investment on the Executive MBA, which is also taught at WBS London.

Professor Ana Galvao also teaches Business Economics on Warwick Business School's Undergraduate programme, Economics for Management and Business on the MSc Management course and The Economics of Overseas Business Investment on the Executive MBA, which is also taught at WBS London.

 
 

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