Wednesday, 15 May 2013

Inflation warning from the Bank of England

Inflation could rise to as high as 5 per cent, according to the Bank of England’s Inflation report released today, which also included an upgrade to its economic growth forecast.

Estimates within the report show the level of inflation in the UK could rise to 5 per cent in the worst case. 




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 The BoE’s report says the UK’s economic recovery ‘remains weak and uneven’, and that although domestic demand increased in 2012, this was offset by a ‘pronounced’ decrease in exports. And, while employment continued to grow, productivity was weaker.

The report cites the government’s Funding for Lending scheme as helping to ease credit conditions, and says there is a ‘gradual fading of the impact of the financial crisis of household and business spending’, calling the effects of the turbulent past few years a ‘hangover’. 

The BoE’s report says the main risks to recovery in the UK still come from abroad, but did raise its forecast for GDP growth this year from 0.9 per cent to 1.1 per cent.

Marcus Bullus, trading director at MB Capita, says he expected a bullish report from the governor, Sir Mervyn King, and that ‘the temptation to look for positives must have been overwhelming’. 

Bullus says the governor’s prediction that the base rate of inflation will remain below 1 per cent for at least four more years does little to inspire confidence. ‘He assured us, one again, that the recovery is in sight. It is, if you are peering through the Hubble space telescope,’ he adds. 

And while many consumers are feeling the impact of continued above-target inflation, Richard Hodges, manager of the LGIM Dynamic Bond trust, says austerity and deleveraging are actually helping to keep it in check. He thinks the worry should be deflation rather than inflation saying, ‘We are seeing growth forecasts for major economies revised downwards and commodity prices on the decline – hardly the recipe for tighter monetary policy.’

Markets rallied on the back of the higher economic forecast and the FTSE 100 rose to a six-year high of 6696.

Reproduced from an article that appeared in Money Observer


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