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BoE’s economic forecast predicts better growth and lower inflation

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Outgoing Bank of England governor Mervyn King boosted sentiment today by forecasting better growth and lower inflation for the UK economy going forward.

In his final quarterly inflation report before handing over the governorship to Mark Carney, King says: “Today’s projections are for growth to be a little stronger and inflation a little weaker than we expected three months ago.

“That is the first time I have been able to say that since before the financial crisis.”

Better-than-expected GDP growth of 0.3 per cent in the first quarter of 2013 has inspired the Bank to increase its forecasts for the coming three years.

CPI inflation remains above the 2 per cent target but is set to edge higher over the coming months and is likely to stay above target for the next two years, as a result of external price pressure and regulated pricing.

But inflation is expected to fall back to about 2 per cent around 2015, aided by a number of factors including lower external pricing pressure and a gradual revival in productivity growth curbs increases in domestic costs.

As usual, the BoE’s projections are based on the assumptions that interest rates follow a path implied by market interest rates, and that the size of the Bank’s asset purchase programme remains at £375bn. The base rate has remained at 0.5 per cent for the past four years and the timing of the first rise implied by market interest rates, has now moved out to late 2016.

The upbeat report however was tempered with caution that the economic recovery remains weak and uneven. Although domestic demand increased moderately during 2012, it was largely offset by a pronounced fall in exports and the weakness of productivity, suggesting that the financial crisis may still be weighing on the current effective supply capacity of the economy as well as on demand.

King adds: “Our economy still faces the challenge of a substantial rebalancing following the abrupt reassessment of future incomes and spending opportunities triggered by the crisis. This has not been a typical recession, and it will not be a typical recovery.”

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