Shock news! The Bank discovers optimism

The Bank of England's latest report forecasts inflation close to target and robust growth by the end of this year. Ben Chu examines the numbers

Sir Mervyn King yesterday signalled that the Bank of England's quantitative easing programme could be coming to end 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 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 two-year-ahead inflation projection means that it is more likely than not that this latest phase of quantitative easing will be the last."

Some private sector analysts had predicted that the total QE programme would reach as much as £600bn.

Sir Mervyn also unveiled an upbeat message on UK growth. "With falling inflation and the prospect of an 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 a "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's forecasts did not factor in the possibility of a potentially disastrous escalation of the eurozone financial crisis.

Sir Mervyn reiterated his view that small firms were suffering as a result of a credit squeeze imposed by private banks. But he said that it would be inappropriate for the Bank to buy up small business loans as part of its asset purchase scheme in order to ease the flow of credit to such firms – something that has been urged by the MPC member Adam Posen. "The first principle is that you need to use the banking system," said Sir Mervyn.

The Treasury is preparing a £20bn national loan guarantee scheme to be unveiled in the March Budget. But Sir Mervyn warned that the details of such a scheme would need to be carefully constructed to prevent the banks "dumping" bad loans on the Treasury. He said: "If the Government feels there is a particular problem with small businesses then the answer is a special scheme for small businesses, but the principle needs to be... to use the infrastructure of the banking system [and to] share the risks between the banks and elsewhere so the banks don't try to dump the worst risks on the public sector."

Sir Mervyn expressed his sympathy for savers, who are receiving negligible returns as inflation, for now, continues to outstrip interest rates. But he said that it would be counterproductive for the Bank to increase interest rates to help as this would simply damage the fragile economy. "These are consequences of the painful adjustment prompted by the financial crisis and the need to rebalance our economy," he said.

The forecasts in numbers

2 per cent The rate at which the Bank's latest Inflation Report forecasts the UK economy to be growing by the end of 2012.

1.8 per cent The Bank's estimated inflation rate in 2014 – up from 1.3 per cent last November and closerto the official target of2 per cent.

£325bn The scale of the Bank of England's asset purchase scheme, which might now not be extended.

0.5 per cent The Bank of England's benchmark interest rate, which is unlikely to be raised before 2014.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific