BOE See Growth Deteriorate, Inflation Remain Elevated In The Near-Term


The BOE unveiled in its quarterly inflation report that economic growth will likely deteriorate in the medium-term. Inflation will likely rise to +5% later this year and will stay above 2% throughout 2012. In the longer-term, the central bank believes inflation will eventually return to its target in 2013.
The central bank expects that ‘the most likely outcome’ for growth in the medium- term is somewhat ‘weaker than in the February report’ due to ‘a more gradual recovery in consumption and a less pronounced boost from net exports‘. Risks to growth are ‘skewed to the downside’. Yet, surveys and the growth in employment over recent months suggest that ‘underlying activity may have been stronger than indicated by official output data’. The central judgment by the MPC is that ‘some pickup in underlying growth is likely during 2011 – albeit less than judged probable in February – driven by a continuing recovery in business investment and a positive contribution from net exports’.
Economic data may display volatility as affected by several temporary factors, including ‘the additional bank holiday for the royal wedding last month, and the impact from the Japanese earthquake and tsunami’.
Headline inflation fell modestly to +4.0% y/y in March but remained elevated and well-above BOE’s target of +2.0%. Concerning inflation, the BOE believes that CPI is likely to ‘rise further this year and is more likely than not to remain above the target throughout 2012. In the near-term, price pressures are ‘markedly higher’ than in February, mainly driven by renewed increases in energy prices. Uncertainty in the outlook is uncertain as the Committee sees that ‘precise timing and extent’ will be sensitive to the extent of any further pass-through from the past depreciation of sterling, and to the evolution of energy and commodity prices.
The BOE left the Bank rate unchanged at 0.5% and the asset-buying program at 200B pound. While 3-way split vote on monetary decision may continue for some time, it’s not likely that the central bank will tighten in coming few months as the majority of policymakers will not prefer risking growth.

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