Bank says inflation will not hit target for two years

City A.M. Reporter
Inflation will not fall below target for another two years, the Bank of England forecast – stressing the outlook was highly uncertain and it stood ready to change policy.

While its quarterly Inflation Report left the door open for more quantitative easing, the Bank also said there was a wider than usual range of views among Monetary Policy Committee members on both the prospects for growth and inflation.

As such, the report is unlikely to settle the debate about what the central bank will do next, with analysts divided over whether the BoE will follow the US Federal Reserve down the path of further monetary easing.

Minutes of the Bank's last meeting – when it kept interest rates at a record low of 0.5 per cent and froze its £200bn pound QE plan – will be published next Wednesday.

Policymakers were split three ways in October, with one voting for higher rates, one arguing for more QE and the remaining seven keeping policy on hold.

The Bank report showed inflation at around 1.6 percent on its two-year policy horizon, assuming interest rates rise very slowly in line with market expectations.

That was slightly higher than the August projection and the near-term inflation profile has also been revised higher so that CPI remains above the two percent target throughout 2011, because of a planned VAT sales tax rise and higher import costs.

"As the impact of those factors on inflation diminishes, inflation is likely to fall back, reflecting continued downward pressure from the persistent margin of spare capacity," the Bank said in its report.

"But the timing and extent of that decline in inflation are highly uncertain."

The Bank said economic growth would slow in 2011 but then pick up to just over three per cent in two years' time.

These forecasts were also highly uncertain, however. Exports had still not picked up as the Bank had expected and, while domestic demand could grow rapidly if confidence recovers, there were also significant downside risks.

"Some households may not yet have fully adjusted to forthcoming fiscal consolidation," the Bank said.

Howard Archer of global Insight said: "We see no reason to change our view that the Bank of England is most likely to keep interest rates down at 0.50 per cent until at least late-2011.

"This reflects our belief that the growth will slow appreciably in the first half of 2011 but that a double dip will be avoided. We currently forecast the first interest rate hike to 0.75 per cent to come in the fourth quarter of 2012, but would not be at all surprised if any hike was delayed until 2012.