The Bank of England said inflation will breach its 2 percent target this year, earlier than it previously expected, before falling back below it in 2006, suggesting it is unlikely to move its benchmark interest rate any time soon.
The risks to its inflation projection are ``broadly balanced,'' the bank said, contrasting with the wording of its February Inflation Report, which said they were to the downside. The central bank trimmed its growth forecast for this year amid signs of a slowdown in consumer demand.
"Inflation has risen more sharply than expected,'' the bank said in the report today. The inflation forecast is "somewhat higher in the first year than in February but lower further out, reflecting the appreciation of sterling and the more subdued prospect for activity.''
Consumer prices rose 1.9 percent in March, the highest in almost seven years, leaving inflation close to breaching the central bank's 2 percent target for the first time since 1998. Still, the central bank left its benchmark rate unchanged at 4.75 percent for a ninth consecutive month on May 6 amid concerns about signs of a slowdown in consumer spending.
The U.K. economy may expand around 2.6 percent this year before growth accelerates to around 3 percent at the end of the two-year forecast horizon, the central bank said today. In February, it forecast growth of 2.7 percent in 2005 and 2.8 percent in 2006. The bank today reiterated that the balance of risks to growth are ``on the downside.''
The report is based on comments by Governor Mervyn King, who added this about the slowdown in the UK economy...
The slowing over recent quarters in the growth of real disposable incomes, household wealth and house prices is sufficient to explain the decline in household spending growth over that same period. But it does not easily account for the sharp falls in retail sales around Christmas and their failure subsequently to recover, so other factors may be at work. It is impossible to isolate the exact causes. As a result, the prospects for consumption are a key source of uncertainty surrounding the central projection.
... and this about their change in thinking on the likelihood of a pickup in inflation:
... the Committee may not have attributed enough of the recent rise in CPI inflation to increased demand pressures, implying a risk of a stronger rise in inflation over the forecast horizon. There is a range of views among members concerning the relative importance of these risks.
As usual, you can sense the range of views in the May Inflation Report's fan charts for GDP growth...
... and CPI inflation:
What does it all mean? Here's the bottom line from the London TimesOnline:
Analysts were quick to form their own judgments on the consequences of the Bank's findings. "The only conclusion that can be drawn with any degree of confidence from the Inflation Report and Mervyn King's comments is that interest rates are set to remain unchanged for at least the next few months," Howard Archer, of Global Insight, said.