BoE: Inflation expected to exceed target
Prospects of another rise in interest rates seem more likely after the Bank of England today said it expected inflation to exceed its target.
The Bank said in a key quarterly report that inflation should move slightly above its 2% target in two years’ time and rise modestly afterwards.
It described this outlook as “a shade higher” than its last report, but added that the risks to inflation were still “on the downside”.
Inflation has risen at a stronger-than-expected rate since then, now standing at 1.6% – prompting many economists to predict another rise in interest rates this year.
The Bank said: “Past experience suggests that such movements are not particularly unusual.”
Although Bank of England Governor Mervyn King said inflation should hit the target slightly earlier than previously thought, he added: “The big picture hasn’t changed a great deal.”
The report said higher import prices and the pressure of demand on supply should push up inflation.
Economic growth also remained robust and close to trend, with the Bank expecting it to pick up towards the end of the forecast period.
But the report also warned that factors such as weaker consumer spending and the recent slowdown in house prices could hold back growth.
Recent official figures showed retailers suffered their worst Christmas in around 20 years.
Mr King pointed out that reports from individual retailers and business surveys also indicated weakness. He added: “So the outlook is highly uncertain.”
The report said: “The balance of risks, both to growth and inflation, is to the downside.”
