The UK can expect the economy to "grow solidly" and inflation to reach its two per cent target over the next few years, a Bank of England rate setter said today.
Sir Jon Cunliffe told an audience at the London South Bank University Centre for International Business Studies:
My central projection remains that the UK economy will continue to grow solidly and that inflation will return to target over the next few years.
But, as always, policymakers need to be alive to the possible meaning of disappointments, to be very sensitive to the possibility of changing temperatures around them, and to the risk of unfortunate events. We have a range of tools at our disposal and should be ready to use them whichever risk materialises.
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He dismissed the idea that long-term factors such as demographics and excess savings were the main factor holding back economic growth. Instead he said the weak recovery after the 2008-9 recession was due to “a series of unfortunate events”.
“I would call this the ‘slow healing’ story. Recoveries from financial busts tend to be slow and painful and can take even longer if in the meantime you are hit by other bad surprises. Indeed, that is why it is worth doing all that you can – in advance and in good times – to avoid financial crisis,” he said.
Yet Cunliffe did say that long-term structural factors were being factored into Bank of England forecasts.
"We have already incorporated a weaker structural picture into our thinking. A few years ago we were expecting a period of above trend productivity growth to recover some of the productivity growth lost during the Great Recession. We no longer expect any catch-up of the lost productivity growth," he said.
He believes inflation will pick up once cheaper oil and commodity prices fade out of the annual price comparisons. He then expects wages to begin climbing, adding pressure on business to hike prices.