The Governor of the Bank of England Sir Mervyn King yesterday signalled that the Bank's quantitative easing programme could be coming to end much sooner than many financial analysts expected. The central bank's quarterly Inflation Report forecast that inflation will rise to 1.8 per cent by 2014, up from the 1.3 per cent prediction it made last November.
The CPI inflation rate is 3.6 per cent at the moment, but the Bank's Monetary Policy Committee expects inflation to fall drastically over this year, creating a medium term risk of the central bank undershooting its target.
Earlier this month the Bank of England's Monetary Policy Committee increased its asset purchase scheme by £50bn to £325bn. Yesterday's higher inflation forecast indicates that the MPC believes that additional monetary easing will be sufficient to bring inflation back to target.
"The Inflation Report was on the hawkish side of expectations," said Alan Clarke of Scotia Capital. "Although, as ever, the Bank kept its options open, the level of the 2-year-ahead inflation projection means that it is more likely than not that this latest phase of quantitative easing will be the last." Sir Mervyn also unveiled a upbeat message on UK growth. "With falling inflation and the prospect of and end to the squeeze in real incomes leading to a recovery in growth, we are moving in the right direction" he said.
The Governor admitted that there is likely to be "zig-zag" pattern of alternating positive and negative growth rates over the coming months, but the Inflation Report forecasts the UK economy to be growing at a rate of more than 2 per cent by the end of this year. Some analysts disagreed. The chief economist at the British Chambers of Commerce, David Kern, said: "While we agree that growth will gradually strengthen from the middle of 2012 onwards, the pace of improvement is likely to prove slower than the report predicts." The Governor did, however, concede that the Bank did not factor in a major escalation of the eurozone financial crisis.Reuse content