By David Robinson and David Thomas
LONDON (MNI) – The Bank of England’s Monetary Policy Committee
hiked its inflation projections in its February Inflation Report,
showing it only just undershooting target two years ahead.
The Inflation Report’s central projections show CPI close to 1.8%
in two years time and at 1.9% in three years time, only a shade under
the 2.0% target. The projections do not rule out further quantitative
easing, however, with the Monetary Policy Committee judging inflation is
more likely to be below than above target for much of the forecast
period.
MPC members remain divided over the likely path for inflation, with
the central projection not shared by all.
“There remains a range of views among committee members regarding
the relative strength of the factors affecting the outlook for
inflation,” the report said.
Key inflation determinants are energy costs and companies’ profit
margins.
“A significant disruption to the supply of oil and gas could lead
to another period of rising energy prices,” the report warns, at a time
when middle east tensions are running high.
Also “businesses’ domestic costs will be heavily affected by the
path of productivity and the degree to which slack in the labour market
limits wage growth.”
The reports “ribbon chart”, showing the probability inflation will
be above the target, shows there is a mid-40s percentage chance of
inflation being above target in two years and still a little less than a
50% it will be above target in three years.
While these probabilities do leave scope for some more stimulus,
they suggest only a little more QE, by recent standards. would be
required to get the inflation risks balance around target. On the BOE’s
own ready reckoners Stg50 billion QE would add around 0.3pp to CPI at
peak, taking the central projection above target.
The report shows CPI back below target in the second half of 2012
and staying there throughout the remainder of the forecast period.
“Inflation is likely to decline sharply in the near term as the
impact of past increases in VAT and petrol prices drop out of the near
term comparison. Thereafter, inflation is likely to fall further, as
upward pressures from external costs diminish and spare capacity
continues to weigh on wages and prices,” the report says.
Near term growth is expected to remain weak but to then pick up,
running at close to 3.0% in two years’ time. The MPC assumes that the UK
growth will get back to close to its historic average, implying no long
term damage to productivity from the financial crisis.
“The Committee’s best collective judgement is that growth is likely
to be subdued in the near term, but that by the end of the second year
of the forecast the risks of growth being above or below its historic
average are broadly equal,” the report says.
The MPC is divided, however, over the outlook. The minutes said
there was still “a range of views” among MPC members over the prospects
for both growth and inflation.
–London newsroom: 4420 7862 7491 e-mail: drobinson@marketnews.com
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