City: Bank looks too bullish on forecasts

THE Bank of England needs to revise down its optimistic growth forecasts and hike its expectations for the path of inflation to bring them into line with other forecasters, City economists have warned ahead of the quarterly Inflation Report on Wednesday.

In its May Inflation Report, the central bank forecast that real economic growth would hit 1.6 per cent in 2010 before surging to 3.4 and 3.6 per cent in 2011 and 2012 respectively.

Commerzbank’s Peter Dixon said: “Although the 2010 estimate does not appear to be way out of line – particularly in view of the strength of second quarter GDP - the forecasts for 2011 and beyond were viewed as overly optimistic. Back in May, the consensus estimates for GDP growth in 2011 and 2012 were 2.1 per cent and 2.4 per cent respectively. Now the Bank’s projections appear off the scale.”

Indeed, the level of GDP is now 7 per cent below but inflation is 1.2 per cent higher than the Bank expected in August 2008, as Fathom Financial Consulting’s Erik Britten pointed out last week. The Bank of England is not expected to upgrade its growth forecasts in light of the stronger growth recorded between April and June due to the deterioration in the global outlook and the impact of the fiscal tightening.

However, City economists say the Bank can no longer ignore the persistently-high level of inflation and the impending VAT hike that will push up the consumer price index (CPI) even further from January 2011.

Investec’s David Page said: “The increase in VAT in January will likely keep CPI above target for much of 2011. A firmer near-term inflation outlook is likely to give way to a softer outlook in the medium-term (reflecting expected weaker growth).”

•Allister Heath is away