Bank of England keeps inflation target at 2%
The Bank of England kept an inflation target of 2% in its sights today - providing a signal that interest rates may remain on hold.
A key BoE report on the UK economy indicated the Consumer Prices Index (CPI) will be around 2% at the end of a two year forecast period, prompting Governor Mervyn King to comment that it was “perfectly reasonable” to look at this and conclude that to leave rates on hold was a “reasonable outcome”.
Forecasts from the Bank anticipated the economy growing a little less than expected in the short term before picking up again.
Inflation, which was at 2.5% last month because of soaring energy prices, is expected to fall back next year before settling near the British government’s 2% target in two years’ time.
Economists were divided over the impact of the Bank’s assessment, particularly as expectations for inflation were weaker than in August and so gave the Bank’s more room to move the base rate – currently 4.5% – if a slowdown persisted.
Jonathan Said, an economist at the Centre for Economics and Business Research, said the threat of wage inflation remained an ongoing concern.
He added: “The Bank is aware of this and with consumer borrowing and the housing market holding up well, the chances of a rate cut early in 2006 seem somewhat lower.”
Malcolm Barr, UK economist at JPMorgan Chase Bank, added: “Taking the inflation report as a whole, we see no reason to change our forecast that rates will remain on hold through the first half of 2006, and rise slightly thereafter.”
The BoE said there was considerable uncertainty over the rate of the recent slowdown and it highlighted the differences between official data and unofficial business surveys, adding that it continued to place some weight on the latter when making interest rate decisions.
Recent weak data has led Chancellor Gordon Brown to indicate he will have to revise his prediction for economic growth of between 3% and 3.5% this year.
Mr King said there were risks to inflation from both directions, although the degree of uncertainty was larger than usual.
“Given the outlook for inflation, and the balanced nature of the risks, the Committee decided last week to leave interest rates at their present level.”
