Bank of England raises inflation forecast for two-year horizon
Wednesday, 15 February 2012 12:25
The Bank of England quarterly inflation report predicts a mixed 2012 for the UK economy.
Sir Mervyn King said that the economy will “zigzag” this year, as it dips in and out of growth. He said that the biggest risk to the UK economy still emanates from the eurozone and that European economies as a whole are unlikely to be fully prepared for the consequences of a Greek default on their debt.
He said one-off factors such as the Queen’s Jubilee and the Olympic Games made growth predictions even more difficult.
Sir Mervyn defended the Bank of England’s policy on interest rates by saying that if rates were increased the UK would fall back into recession.
Sir Mervyn gave little indication as to whether there will be even more quantitative easing to come later this year following the £50 billion that was announced last week at the Monetary Policy Committee’s February rate-setting meeting.
He reiterated the Bank of England’s belief that inflation will continue to fall during 2012 and possibly be lower than the Bank’s target of two per cent. The main factors influencing the fall in inflation will be continued low pay settlements and the fall in energy prices.
Follow Myfinances.co.uk on Twitter: @news_myfinances
However, the Bank has amended the level it believes inflation will reach by 2014 to 1.8 per cent from 1.5 per cent.
Howard Archer, Chief UK & European Economist at HIS Global Insight said: “Significantly, the central consumer price inflation forecasts contained in the report have been raised to show inflation standing around 1.8% at the end of the two-year policy horizon based on unchanged Quantitative Easing of £325 billion and the markets’ assumption that Bank Rate remains at 0.5% until the end of 2013 or early-2014 and then rises only very gradually.
“This is close to the 2.0% Bank of England’s target inflation rate and is higher than the November inflation report’s forecast of inflation of 1.5% on a two-year horizon.”
Asked about what level of asset purchases were required to help the Bank of England reach its stated target of two per cent inflation, Deputy Governor, Charles Bean said: “By the end of the forecast period the chances of being above or below target are 50:50. The risks around the target are equally balanced.”
He believes that the revised growth figure for 2012 that he predicted in the last quarterly inflation report from November of one per cent was broadly accurate and that the UK has a credible medium term deficit reduction strategy. Sir Mervyn said that he thinks GDP growth will reach 1.2 per cent in 2012.
He said that other risks could affect inflation, particularly any potential problems in Iran or Nigeria that disrupted the supply of oil.
Sir Mervyn King was asked about bankers’ incentives and whether members of the Monetary Policy Committee (MPC) should ever receive incentives bearing in mind how often the MPC had missed its inflation target.
Sir Mervyn said: “No. It’s up to you and parliament. I think that’s a rather foolish way of looking at it.
“What we have done in the last 3-4 years is explain why we have missed targets and not change interest rates just to meet the target year after year.”
Sir Mervyn spoke about the wider issue of banker bonuses and said: “What we need is a proper public debate. That’s what improves policy.”
Read the report from the Bank of England's last quarterly inflation report in November here.
Sign up to the Myfinances.co.uk newsletter to receive the latest financial news direct to your inbox.
Comments
Newsletter sign up