INFLATION will stay above target for another year, the Bank of England warned yesterday, while Britain’s economic growth will be even weaker than it expected just a few months ago.
Households will keep suffering under soaring prices all year, with inflation only expected to fall back to its two per cent target in the middle of 2013, the May Inflation Report predicted.
Governor Mervyn King argued that he could have taken steps to cut runaway inflation over recent years, but only at the price of higher unemployment and even lower economic growth.
Price rises are falling more slowly than expected because of rising utilities bills and oil prices, but the gradual overall downward trend in inflation should continue because of weak pressures from domestic factors like wages.
However, the Bank still expects inflation to fall below target in 18 months to two years’ time, which economists believe could mean more policy loosening is on the way.
“We assume that some MPC members, given this forecast, actually voted for extra quantitative easing (QE) last week,” said Citi’s Michael Saunders.
“It may be that the majority did not wish to surprise markets with extra QE last week, but chose instead to soften expectations with the lower inflation forecasts first – in order to be ready to expand QE soon (perhaps in June or July) if needed.”
Meanwhile the Bank cut its GDP growth forecasts to around 0.8 per cent for 2012, down from 1.2 per cent in its forecasts three months ago.
King maintained the economy should recover in coming years to achieve growth rates of two to three per cent in 2013 and 2014, but said the ongoing squeeze on household incomes and the pressure on bank funding conditions from the renewed Eurozone crisis have also hit growth.
The Bank also suggested the UK may have avoided a technical recession – falling unemployment and positive survey data mean it expects the first quarter’s GDP figures to be revised up – but did warn that the second quarter will remain weak.
In particular, the Inflation Report estimated the additional Diamond Jubilee bank holiday could knock 0.5 percentage points from the GDP figure in the quarter.