Bank of England Inflation Report Shows Inflation, Growth to Moderate
The Bank of England said this morning that inflation will likely remain high over this year and higher than the MPC thought three months ago. However, they do expect inflation to fall back next year, though uncertain unto what extent but possibly falling below the 2% target. Bank of England Governor Mervyn King said that there are large risks on both sides of the inflation outlook but it is “reasonable” to consider inflation easing in 2012.
On growth the central bank said that their outlook for GDP growth is lower than in November, the forecast remains for moderate growth in 2011. The central bank did, however, lower their 2011 GDP forecast on weak Q4 growth noting that the outlook for growth remains “highly uncertain”. Adding that there was a wider than usual range of forecasts and opinions among the MPC amid such uncertain times.
On balance then the inflation report mirrored what was said in Governor King’s letter to Chancellor Osborne, acknowledging the latest acceleration in inflation but maintaining that the MPC must steer monetary policy based on the CPI outlook over the medium-term. He added that there is no pre-commitment on rates, noting that some are ahead of the curve in terms of tightening expectations and timing. In short, with such a high degree of uncertainty the central bank is cautious in trying to predict exactly how things are going to play out and are keeping all the options open.
The pound was immediately weaker across the board, and against the buck it extended its morning declines, on the not-so-hawkish inflation report. With the central bank standing by its estimations that inflation will moderate into 2012 and even fall below target waning expectations of imminent rate hikes have taken some wind out of the pound’s sails. We remain dip buyers of the pound at this stage given that the Bank of England is still likely to be the next major CB to move on rates ahead of the ECB and of course the BoJ and Fed.
Written by Jonathan Granby, DailyFX Research Team
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