Bank of England sees UK inflation above target until 2016

The Bank of England forecast on Wednesday that inflation will not return to target until early 2016, but said it was still open to more bond purchases to boost Britain’s stagnant economy.

Britain’s economy was set for a “slow but sustained recovery” over the next three years, and economic output was unlikely to surpass its pre-financial crisis peak until 2015, the central bank said.

“The expansion is expected to be weak by historical standards, mirroring the relatively subdued prospects for both global demand and the supply capacity of the domestic economy,” it said in its quarterly Inflation Report.

The central bank’s quarterly forecast update showed that inflation in two years’ time was likely to be around 2.3 percent, up sharply from the 1.8 percent forecast in November.

Inflation is not forecast to fall below the central bank’s 2 percent target until the first quarter of 2016 – 18 months later than it forecast in November.

Before the financial crisis, economists would have interpreted this forecast as a clear signal that interest rates were about to rise.

But the Bank said that much of the higher inflation was due to sterling’s weakness and rises in prices partly set by the government, and that “it was appropriate to look through the temporary, albeit protracted, period of above-target inflation.”

The Bank of England generally sets monetary policy with the aim of ensuring that inflation has returned to its 2 percent target within two years, though there is speculation that incoming governor Mark Carney, who starts in July, may take a more flexible approach.

Inflation has exceeded the central bank’s 2 percent target since December 2009, and its persistent failure to return to target is one reason why the BoE has not increased bond purchases past the 375 billion pounds reached in October.

However, Wednesday’s inflation report – which in parts closely echoed a statement accompanying last week’s Monetary Policy Committee decision to reinvest its maturing gilt holdings – showed the MPC was still open to more asset purchases.

“The Committee agreed that it stood ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation,” the report said.

Economists had widely expected the BoE to revise up its inflation forecast, after a more than 3 percent fall in sterling over the previous three months and the MPC’s statement last Thursday that said inflation might exceed 2 percent for the next two years.

The growth outlook in the report was fractionally weaker than that given in November, with growth seen rising relatively steadily to average an annual rate of around 1.9 percent by the first quarter of 2015.

Economists polled by Reuters last month expected growth of 1.0 percent this year and 1.4 percent in 2014, while inflation is expected to peak at 2.8 percent in the second quarter of 2013 before falling to average 2.0 percent over 2014 as a whole.

The BoE forecasts suggest inflation will peak at around 3.2 percent in the third quarter of 2013.

Some policymakers doubt whether bond purchases still have the ability to boost growth, and think alternatives such as the BoE’s Funding for Lending Scheme may work better.

The BoE said that there was growing evidence that the FLS was helping private sector credit conditions, though it was too early to see an increase in net lending.

Πηγή: Reuters