Bank predicts inflation spike

10 February 2010 11:54 am | By Lee Jones

In its latest inflation report, the Bank reported that while inflation hit 2.9 per cent in December and may spike beyond 3 per cent in January, over the medium term the effects of the £200bn quantitative easing programme will keep inflation low. But the Bank does admit that it is unsure about how far it will fall back.

The report says: “Output has stabilised and confidence has recovered. The additional money created by the asset programme will continue to boost the economy for some time to come.

“But the nature of the headwinds means that the recovery is likely to be slow. And there is much uncertainty – about both the outlook for the world economy and the strength of domestic spending.”

The Bank says it has “cautious optimism” with regard to the economy at large. It predicts that GDP could grow in 2010 thanks to a fall in Sterling, the £200bn stimulus, a rise in asset prices and improving sentiment from both households and business.

In a press conference this morning, Governor Mervyn King said: “asset price rise is a sign of quantitative easing success” but admitted that a rebalancing of the UK and global economies was still necessary.

While the Monetary Policy Committee put the fiscal stimulus on hold in February, the Bank argues it is too early to tell whether it will have to inject more money into the UK economy. King said “now seemed like a good time to take stock” and the MPC will judge future injections on inflation movement over the year but was “prepared to purchase more to keep inflation low”.

As for the public deficit, King admitted the huge fiscal deficit was a “surprise” in the wake of the credit crunch, but said the Bank was confident that any future Government would address the debt problems.

He said: “Governments need clear and credible plans to reduce structural deficits, and clearly the UK has a very large structural deficit that needs to be consolidated.”

King said it was difficult to make further predictions on the wider economy because it is unknown how business and households will react to fiscal tightening and whether that will involve tax hikes or spending cuts.

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