Bank of England says inflation to remain above 2% mark until 2016

February 13, 2013

Bank of England governor Sir Mervyn King has said that he expects inflation to rise from its current level of 2.7% to at least 3%, and to remain there until the start of 2016.

Sir Mervyn’s remarks were made during the Bank of England’s quarterly Inflation Report on Wednesday.

This follows the Bank’s November report, where it was stated that inflation would fall back to around 2% in the second half of 2013.

However, Sir Mervyn remained optimistic during his report, stating, “There is cause for optimism…Today, too, the recovery is in sight.

“Although output has been broadly flat for the past two years, that masks a more encouraging underlying picture.”

Sir Mervyn talked about the need to rebalance the economy and stated he had always said that this is essential.

Others did not share his optimism. Emmanouil Schizas, Senior Economic Analyst at ACCA (the Association of Chartered Certified Accountants) said:

“It’s no surprise to hear the Bank of England admit they are going to miss their inflation target for the next three years.

The fact that they had previously expected to meet the target by the third quarter of this year is perhaps more noteworthy.

Even their updated expectations depend on productivity rebounding, presumably to trend or past average levels.

Yet the on-going debate on the UK’s falling productivity is increasingly suggesting that productivity will not rebound – the UK economy has changed in a structural way and productivity is simply reflecting this.”

Concern about future monetary policy was shared by David Kern, Chief Economist at the British Chambers of Commerce (BCC), who said:

“Mervyn King tried to paint a less pessimistic picture about the UK’s recent performance, by emphasising that manufacturing and services taken together have recorded positive growth over the past year.

“However it is clear that the outlook over the next three years remains grim,” he said. “The pace of expansion in the economy will remain weak, and inflation is likely to stay above the target over the next two years. The squeeze felt by businesses and consumers will persist, and given the continued difficulties facing the eurozone, it will be very difficult to rebalance the economy towards net exports, in the short-term.”

Sir Mervyn said the rise in inflation was mostly due to factors outside the Bank’s control. He said, “If you like, it is a bit of a self-inflicted goal in terms of the damage done to real take-home pay, perhaps another way of trying to implement fiscal consolidation through moving up the price level,” he said.

“This is not the result of easy monetary policy and nor does it reflect what’s going on in the economy.”

News of the above-target inflation sent the already-weak pound falling on currency markets.