Silence of the doves as inflation concerns grow

Tim Wallace
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AFTER tolerating the UK’s high inflation for years, Bank of England officials have suddenly begun to worry that it is not coming down towards its two per cent target as they had hoped.

The Bank had predicted inflation would fall to its target before the end of the year, but deputy governor Paul Tucker yesterday warned it could remain above three per cent throughout the second quarter of this year and “possibly into the second half of the year”.

“We will guide inflation back to target in the medium term, but in the near term there is considerable uncertainty about the path that it will follow,” Tucker said.

Even arch-dove Adam Posen, often the sole voice on the Monetary Policy Committee (MPC) advocating increased quantitative easing (QE), this month voted to hold policy unchanged.

The pound strengthened on the news that more QE was less likely, rising 0.61 per cent against the dollar to $1.60 and 0.62 per cent against the euro to €1.22.

The minutes of the MPC’s latest meeting reveal growing worry that inflation “would fall less rapidly in the near term” than the committee had anticipated in its February inflation report.

Back in October the MPC was so convinced that inflation would fall too far below its two per cent target that it announced an extra £75bn in QE to try to boost inflation.

However, rising energy costs pushed consumer price inflation back up in March to 3.5 per cent.

David Miles was the only MPC member who voted for more QE this month, and even that call was “finely balanced,” the minutes noted.

At the same time as revising up its inflation forecast, the MPC minutes warned that growth could be more lacklustre than previously feared.

Pointing to depressed construction sector output in January and February, as well as the likely loss of activity caused by the Jubilee bank holiday in the second quarter of this year, the MPC said it “could not rule out the publication of official data showing GDP falling for three successive quarters.”

However, it maintained its central forecast for modest growth this year.