Bank warns on inflation and low investment levels

The Bank of England is to warn the Government this week that inflation targets will be missed and that investment is worryingly low, despite strong growth in dividends and profits.

The depressing outlook on prices and investment from the Bank, which will emerge in official publications due on Wednesday, will come hard on the heels of an expected recommendation from the Organisation for Economic Cooperation and Development that UK interest rates should rise to control inflation.

This would be the second time in just over a month the OECD has given the Government the same message.

The Bank's inflation warning will be contained in its Inflation Report, to be published on Wednesday.

It will confirm a widespread view in the City that Eddie George, Governor of the Bank of England, is refusing to back down from his claim that interest rates should rise to prevent inflation going outside the target range.

The Bank also hit back at attacks on its methods for forecasting inflation, which are pivotal in influencing the advice it gives the Chancellor on interest rates but which critics have said are too pessimistic. An article released ahead of publication of the Quarterly Bulletin on Wednesday mounts a vigorous defence of its methods.

The Bank has come under criticism for crying wolf on inflation since its current elevated role in policy began. In the majority of its predictions since the start of 1993, the Bank has been too pessimistic.

However, the Bank insists that the inflation projection "is not derived mechanistically", nor is it "simply extracted from a model of the economy". Leading indicators, surveys, information from the Bank's agents and judgement also play a vital role in arriving at the projection.

Another Bulletin article says there is a shortfall of investment in the current recovery compared with the upswing of the early 1980s. Business investment - defined broadly to include public corporations as well as private companies - has "recovered slowly and hesitantly". In real terms, it is still below the level reached at the low point of the cycle in early 1992.

But corporate profitability is not the problem holding back investment. Although it fell sharply in the first quarter of 1995, it grew rapidly in 1994. Dividends, too, "grew extremely strongly".

They were some 30 per cent higher in the fourth quarter of 1994 than at the beginning of the year.

For plant and machinery, the investment increase of under 5 per cent is modest in comparison with the Eighties, when by a similar point in the cycle, investment was 10 per cent up.

The Bank suggests there are some special factors that have depressed total investment in the current recovery.

The overhang of the property boom of the late 1980s is continuing to depress new construction. And the counter-cyclical investment in the utilities and oil industry, while welcome at the time, is now spoiling the investment picture in the recovery.

The Bank makes it clear that uncertainty may be constraining investment growth. Firms are still slow to adjust down their target rates of return because of fears of a return to high inflation - a concern raised by the Bank a year ago. Furthermore, companies may be worried about just how long the recovery will last.

"Firms have perhaps been willing to risk losing future output and perhaps sales, because they have believed the sunk costs of investing represented too big a gamble."

The export-led nature of the recovery may have contributed to this caution, says the Bank. "Exports tend to be more volatile than domestic demand and this may have added to producers' uncertainty."

Nevertheless, the Bank believes investment "is likely to strengthen during this year".

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 People

Compensation and Benefits Manager - Brentwood - Circa £60,000

£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

Finance Manager - Recruitment Business (Media & Entertainment)

£28000 - £35000 per annum + negotiable: Sauce Recruitment: We have an exciting...

HR Advisor - North London / North West London

£30000 - £35000 per annum + Benefits: Ashdown Group: HR Advisor - North London...

Finance Manager - Recruitment Business (Media & Entertainment)

£28000 - £32000 per annum + negotiable: Sauce Recruitment: We have an exciting...

Day In a Page

The drugs revolution starts now as MPs agree its high time for change

The drugs revolution starts now as MPs agree its high time for change

Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

Gotcha! The camera is turned on tabloid editors

Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

Fall of the Berlin Wall

It was thanks to Gorbachev that this symbol of division fell
Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

What makes ouija boards and demon dolls scary?

Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

Rose Rouse's safari in modern Britain

Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

'My world of no smell and odd tastes'

A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

Matt Parker is proud of his square roots

The "stand-up mathematician" is using comedy nights to preach maths to big audiences
Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

Paul Scholes column

Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

Frank Warren column

Call me an old git, but I just can't see that there's a place for women’s boxing
Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

Adrian Heath's American dream...

Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
Simon Hart: Manchester City will rise again but they need to change their attitude

Manchester City will rise again but they need to change their attitude

Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities
‘A bit of a shock...’ Cambridge economist with Glasgow roots becomes Zambia’s acting President

‘A bit of a shock...’ Economist with Glasgow roots becomes Zambia’s acting President

Guy Scott's predecessor, Michael Sata, died in a London hospital this week after a lengthy illness
Fall of the Berlin Wall: History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War

Fall of the Berlin Wall

History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War
How to turn your mobile phone into easy money

Turn your mobile phone into easy money

There are 90 million unused mobiles in the UK, which would be worth £7bn if we cashed them in, says David Crookes