Tags: BOEs KingInflation May Reach 5percentas Growth Forecast Cut

BOE's King: Inflation May Reach 5% as Growth Forecast Cut

Wednesday, 11 May 2011 07:19 AM

Bank of England Governor Mervyn King said that inflation remains “uncomfortably high,” and officials signaled they may need to raise interest rates later this year even as the economy struggles to build momentum.

“The recent pattern of revisions to the projections over the next year — downward to growth and upward to inflation — has continued,” King told reporters in London today. Inflation “remains uncomfortably high and well above the 2 percent target. And there is a good chance that, if utility prices rise further later in the year, inflation will reach 5 percent.”

The pound rose after the release of the bank’s forecasts, which showed that a quarter-point interest-rate increase by the end of the year may be needed to control inflation, which officials see “markedly higher” in the short-term than they did in February. The central bank kept its benchmark rate at a record low of 0.5 percent last week to aid economic growth.

“The most likely outcome for growth in the medium term is somewhat weaker than in the February report, reflecting a more gradual recovery in consumption and a less pronounced boost from net exports,” the bank said in its Inflation Report published today. Inflation “is more likely than not to remain above the 2 percent target throughout 2012.”

Inflation across the world is persisting, putting pressure on central banks to withdraw stimulus and raise interest rates. In China, inflation held above 5 percent in April and lending exceeded analysts’ estimates, according to reports today. Germany’s rate jumped to 2.7 percent, more than initially estimated, separate data released today showed.

Market Reaction

The pound rose as much as 0.5 percent after the Bank of England report, and traded at $1.6489 as of 11:42 a.m. in London. The yield on the benchmark two-year government bond gained by 6 basis points today to 1.078 percent.

The bank’s forecasts are based on market expectations of a quarter-point interest rate increase by the end of this year and The rate having tripled to 1.5 percent in the third quarter of 2012.

“Bank rate can’t stay at this level for ever,” King said.

“But that doesn’t tell you what month” it will increase even if it’s a “reasonable judgment” that the interest rate will rise in next two years, he said.

While the near-term price outlook has worsened, the bank said it still sees inflation falling to its goal in 2013. The chance of inflation “being above or below the target, are, as in February, broadly equal in the medium term.”

‘Skewed’ Risks

The bank said while risks to growth are “skewed to the downside,” surveys and growth in employment in recent months “suggest that underlying activity may have been stronger than indicated by official output data.”

“Some pickup in underlying growth is likely during 2011 — albeit less than judged probable in February — driven by a continuing recovery in business investment and a positive contribution from net exports,” the bank said.

Temporary factors, such as the additional bank holiday for the royal wedding last month, and the impact from the Japanese earthquake and tsunami, “are likely to add some volatility” to data.

The bank sees inflation at about 2 percent in the first quarter of 2013, based on a chart of quarterly average projections. Gross-domestic-product growth is seen at about an annual 2.9 percent. The bank publishes its quarterly predictions in the form of fan charts without specifying exact numbers. It will release data indicating exact figures next week.

“Under the assumptions that bank rate moves in line with market interest rates and the stock of purchased assets financed by the issuance of central bank reserves remains at 200 billion pounds, the chances of inflation being above or below the target in the medium term are judged to be about the same,” the bank said in its report.

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Bank of England Governor Mervyn King said that inflation remains uncomfortably high, and officials signaled they may need to raise interest rates later this year even as the economy struggles to build momentum. The recent pattern of revisions to the projections over the...
BOEs KingInflation May Reach 5percentas Growth Forecast Cut
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2011-19-11
Wednesday, 11 May 2011 07:19 AM
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