ON THE MEND (OR SO KING HOPES)
THE BANK of England hiked its growth forecasts for the next three years yesterday in its clearest signal yet that it believes the UKeconomy is finally on the mend.
The Bank’s new central projections are for output to grow by 2.1 per cent next year and by four per cent in 2011, based on market expectations of interest rates and assuming that quantitative easing remains at the current £200bn.
It also raised its inflation forecast and said that inflation was likely to rise above the two per cent target in the short-term due to rising energy prices and the reversal of the VAT reduction. But the Bank nonetheless predicts that inflation will be beneath target in two years’ time, assuming the cost of borrowing and quantitative easing (QE) both remain on hold.
Analysts saw this as confirmation that the latest QE injection is likely to be the last, but King refused to be drawn. “It certainly would be wrong to conclude we’ve decided that. We’ve made no judgement at all, we’ve a completely open mind whether to do more asset purchases or not. What we did last week was not a first step towards anything,” he said.
But Citi’s Michael Saunders noted: “It is unlikely the MPC will want to keep monetary policy ultra-loose for long if the recovery really is as strong as the inflation report projects.”
The Bank’s revisions to its growth and inflation forecasts followed better-than-expected unemployment data yesterday, which showed that only 30,000 jobs were lost in the three months to September. Employment rose by 6,000 to 28.93m, the first increase since July 2008. But unemployment hit 2.46m, or 7.8 per cent of the workforce.
While this provides some hope that the labour market is now levelling out, economists warned that the rise in employment in September was driven by an increase in part-time and self-employed workers.
A survey yesterday from pre-employment firm Powerchex showed that offers in the City are on the rise, increasing by four per cent in October, with investment managers seeing an unexpected 51 per cent increase in job offers.
The more optimistic forecasts and data reassured investors yesterday. The FTSE 100 rose strongly towards 5,300, a level which it is widely expected to breach in the coming days. Investors were also buying heavily into gold with Barclays Capital projecting that the precious metal will command as much as $1,500 an ounce.