Bank forecasts two years of steady growth with inflation hitting target

INFLATION WILL fall further owing to the strong pound and more intense competition, before rising to the 2.5 per cent target level in two years' time, according to new Bank of England forecasts.

The Bank's Inflation Report yesterday predicted steady growth, in line with the forecasts in the Chancellor's pre-Budget statement. However, the Bank's Monetary Policy Committee remained divided on inflation prospects, with individual assessments of the most likely rate ranging from 2 to 3 per cent.

For the first time the central inflation forecast incorporated assumptions about the outlook for the exchange rate and the impact of increased high- street competition, reflecting the concerns of the MPC's doves.

Mervyn King, Deputy Bank Governor, accepted that the row over research support for external MPC members had been "damaging", but said it had not affected interest-rate decisions and was close to a solution. "I am convinced that, with goodwill, very shortly we will reach an agreement on this," he said.

"With recent growth surprisingly strong and recent inflation surprisingly low, and with unemployment at its lowest level for 20 years, there are surely grounds for optimism," Mr King said. He said the two recent rate rises would sustain growth by controlling inflationary pressures two years from now.

Robert Barrie, UK economist at CSFB, said the report was very encouraging. "It raises the hope that interest rates will not have to get as high as 6 per cent." The MPC raised rates by a quarter-point to 5.5 per cent last week, following a quarter-point increase in September.

Mr King said there was a greater than one-in-three chance that in the next 12 to 18 months inflation could fall below 1.5 per cent - the level that would force Eddie George, Bank Governor, to write a letter of explanation to the Chancellor.

The lower inflation forecast takes account of reductions in water and electricity prices, which in the short term mask pressure from rising commodity prices, faster earnings growth and strong consumer demand. The report noted that growth has been much stronger than expected, with consumer spending growing buoyantly.

The forecast has altered the assumption made about the exchange rate, taking the average of the levels implied by a constant exchange rate on the one hand and, on the other, the previous convention that sterling will fall in line with interest-rate differentials. This knocked 0.3 of a point off the central inflation forecast, compared with the old assumption, for the end of 2000.

Intensifying retail competition also contributes to the bright inflation outlook. It was assumed to take 0.2 points off inflation in each year, and the Bank will keep the impact under review.

The MPC's nine members were unable to agree on inflation and growth prospects. The Inflation Report publishes a table showing the extent to which their different views would alter the central forecast. Mr King said all had agreed that inflation would fall before picking up strongly later.

Mr King explained there had been difficulties when individual MPC members wanted to commission research not seen as a priority by other members, saying there was a need to provide extra support for personal research. "That concern needs to be catered for," he said.

Outlook, page 21

Start your day with The Independent, sign up for daily news emails
Sport
Seth Rollins cashes in his Money in the Bank contract to win the WWE World Heavyweight Championship
WWERollins wins the WWE World Heavyweight title in one of the greatest WrestleMania's ever seen
News
news
Arts and Entertainment
Jay Z has placed a bet on streaming being the future for music and videos
music
News
i100
Arts and Entertainment
tvPoldark, TV review
News
(David Sandison)
newsHow living on a houseboat meant I didn't officially 'exist'
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor