BoE raises inflation forecast; sees slow but sustained recovery
2013-02-13 15:24:08
The Bank of England lifted its inflation forecast despite subdued real pay growth, citing the weakness in sterling and higher tuition fees. Further, the bank expressed readiness to provide more stimulus if needed to underpin recovery that is set to be slow.
Inflation is likely to increase further and stay above the 2 percent target for the next two years, the bank said in its quarterly Inflation Report published on Wednesday.
Nonetheless, it is forecast to fall back to the target thereafter. In two years time, inflation is seen at around 2.3 percent compared to the 1.8 percent projected in November.
The upward revision to inflation outlook reflects the recent weakness in currency and increases in regulated prices, BoE chief Mervyn King said at the press conference.
Any attempt to bring inflation back to 2 percent sooner by removing the current policy stimulus more quickly than currently anticipated would risk derailing the recovery as well as undershooting the inflation target in the medium term, BoE noted.
The central bank sees a "slow but sustained economic recovery" over the next three years, underpinned by quantitative easing and the Funding for Lending Scheme. "But the risks are weighted to the downside, not least because of the challenges facing the euro area," it says.
The BoE forecasts GDP to remain below its pre-crisis level until 2015. The bank projects economic growth of about 1.9 percent in 2 years, slightly down from its previous estimate of 2 percent.
The economy shrank 0.3 percent in the fourth quarter of 2012. Over the past year, overall output has been broadly flat, the bank said.
The weakness in the economy and the prospect of a further prolonged period of above-target inflation were taken into account while maintaining a GBP 375 billion quantitative easing and a 0.5 percent interest rate in February.
Despite acknowledging the limitation of QE, King reiterated that BoE will add to stimulus if warranted. It is appropriate to look through the temporary, albeit protracted, period of above 2 percent inflation in order to support growth and employment.
BoE Governor-designate Mark Carney last week played down speculation about a change in monetary policy stance. He said a central bank should be flexible regarding the time horizon to return inflation to target.
A report from the Office for National Statistics showed that average earnings of UK employees were at roughly 2003 levels. Real wages peaked in 2009 after three decades of strong growth. Since then inflation has outstripped wage growth.
Given that consumer spending accounts for some 63 percent of GDP on the expenditure side, reduced real incomes reinforces belief that economic recovery will be only gradual for an extended period and vulnerable to relapses, Howard Archer, chief UK economist at IHS Global Insight estimated.
Despite subdued wage growth inflation has been above 2 percent since late 2009. Headline inflation has been at 2.7 percent since October.