The financial markets wanted to see if the bank thought the outlook for inflation had been improved.
In fact, the Inflation Report presents a relatively gloomy picture. The bank has increased its forecast of inflation over the next six months or so, from around 2.25% to around 2.75%, and still believes that inflation is more likely than not to be above the top of the government's 1 to 2.5% target range in two years' time.
The bank argues that there have been three significant developments in the last three months: a deterioration in the short-term outlook for inflation, an upward revision to estimates of output growth in the first half of 1996 and a rise in sterling's trade-weighted index of 8%. (The rise in base rates is felt to be unlikely to have much impact on the outlook for inflation because mortgage rates did not rise in response). The first two point to higher inflation, the last to lower inflation.
The bank's attitude to sterling's appreciation is more surprising. If sterling had fallen by 8%, it is highly likely that they would have argued that inflation risks had increased. So why will they not accept that an 8% appreciation is a significant tightening of monetary policy?
First, they argue that sterling's rise may not be sustainable. This may be true, but in the past they have based their inflation forecasts on an assumption that the exchange rate would not change, so this change in practice is a little dubious. In any case, there is no evidence that exporters find the present exchange rate a problem.
Second, the bank says its main worries are domestic demand, not the export sector. True again. But, by lowering import prices, a rise in sterling can help ease the pressures on domestic output caused by strong demand.
By emphasising the negatives for inflation and playing down the positive impact of sterling's rise, the Bank argues that a further rise in base rates 'is likely to become necessary in due course'. The chancellor is unlikely to agree, except perhaps if sterling does fall sharply in the next few months. The bank's forecast still shows inflation falling to below 2.5% during 1997 (although after the last date for a general election). This will be enough for him to resist any calls for higher base rates. The fact that the bank also sees inflation rising again in 1998 is well beyond his current focus.