Bank of England set to lower growth forecasts
The Bank of England is expected to downgrade its growth forecasts today and warn of more financial pain for households after figures confirmed inflation remained above target last month.
Economists predict central bank boss Sir Mervyn King will paint a grim picture of rising inflation and difficult economic conditions when the latest quarterly forecast is released.
In an unexpected statement to support its decision to keep interest rates on hold last week, the Bank's Monetary Policy Committee (MPC) warned inflation was likely rise in the coming months and might remain above the 2% target for another two years.
The Office for National Statistics (ONS) said that the Consumer Prices Index (CPI) held firm at 2.7% in January for the fourth month in a row.
Retail Prices Index (RPI) inflation, which includes housing costs, rose to 3.3% in January from 3.1% in December.
Experts predict energy price hikes and rising food prices could push CPI above 3% by the summer.
That means one of incoming Bank governor Mark Carney's first tasks this summer could be to write a letter to the Chancellor to explain why inflation is more than 1% above target.
As well as energy bill hikes and university tuition fees, inflation is being driven higher by the weaker pound, according to Howard Archer, chief UK and European economist at IHS Global Insight.
He said: "Once again the Bank of England will likely have the dismal task of raising its consumer price inflation forecasts and cutting its gross domestic product (GDP) growth projections."
The Bank is likely to admit it was overly optimistic in its November report, when it said inflation would fall back towards target in the second half of 2013.
Its forecast for 0.5% growth in 2012 has already been proven wrong after a worse-than-expected 0.3% decline in fourth quarter GDP left the economy unchanged overall last year.
The contraction - which left the UK on the brink of an unprecedented triple-dip recession - is likely to see the Bank trim its forecasts for 2013.
It downgraded its 2013 growth forecast to around 1% in November, but could bring this down yet again.
But Markit chief economist Chris Williamson said there might be a glimmer of hope for later in the year.
"The Bank will indicate that it expects a modest recovery later this year as the Funding for Lending scheme (FLS) has a beneficial impact and global economic conditions continue to improve," he said.
The Bank's multibillion-pound FLS scheme, which provides cheap money to lenders, has shown some encouraging signs of providing firepower to the economy after Halifax house prices recorded their strongest quarterly rise in three years in the three months to January.
Recent figures have pointed to a better start to 2013 for the wider economy, despite the snow impact.
The latest industry survey from the services sector - which accounts for around 77% of GDP - signalled a return to growth and the highest activity reading since last September.
Figures from the British Retail Consortium (BRC) also suggested the high street performed far better than expected, with like-for-like January retail sales growing at the fastest rate since December 2011, up 1.9% on the previous year.
The inflation figures from the ONS showed a hike in the price of alcohol and food costs offset a fall in clothes and shoe prices as Christmas discounts came to an end.
A shortage of vegetables in the UK contributed to the food price rises as more produce was sourced overseas.
Some economists had expected a price hike from energy giant E.ON on January 18 to push up inflation, but the ONS said the last of the "big six" energy hikes would be taken into account in February's figures.
Stubbornly high inflation - which has remained unchanged for four consecutive months for the first time since records began in 1996 - is causing problems for policymakers as they also weigh up the risks to the economic outlook.
The Bank held off from more money printing measures last week, keeping its quantitative easing (QE) programme at £375 billion, while it also kept interest rates at 0.5%.
Vicky Redwood, chief UK economist at Capital Economics, said there could be more QE in the pipeline after the MPC said it was prepared to "look through" the inflationary pressures.
She said: "If the economy continues to struggle, above-target inflation should not be a barrier to further stimulus. What's more, we still expect inflation to fall back towards the end of this year as underlying price pressures fade further."
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