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Bank surprised by resilient inflation

THE Bank of England yesterday raised its short-term inflation forecast as part of its quarterly Inflation Report and it now expects the consumer prices index to stay above the two per cent target until the start of 2011.

The central bank admitted that it had been surprised by how resilient inflation had been and suggested a quicker feed-through of a weaker sterling or a change in firms’ pricing behaviour as reasons.

The Bank’s governor Mervyn King said that the Monetary Policy Committee (MPC) was very concerned about what has been happening to inflation and stressed that it was not complacent, despite analysts’ concerns that the MPC could lose its inflation-targeting credibility.

The Bank of England also published a less optimistic forecast for near-term GDP growth, noting: “The downside risks to growth in the near term have increased somewhat, reflecting in particular heightened market concerns about the prospects for fiscal consolidation in a range of countries.”