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BoE says UK economic recovery 'in sight'

Factors outside the Bank's control seen pushing inflation upwards

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The Bank of England (BoE) believes a UK economic recovery is in sight but inflation is likely to remain above its target rate of 2 percent for another two years.

In its quarterly inflation report published on Wednesday, the UK central bank said the headline inflation rate, currently at 2.7 percent, is expected to rise to at least 3 percent by the summer and will remain above its target rate of 2 percent for another two years.

The bank's forecast actually suggests inflation will peak at about 3.2 percent sometime in the third quarter of 2013. Launching the report, outgoing BoE governor Sir Mervyn King said that factors outside of the central bank’s control had added to the inflation rate in recent months. In particular, these include a rise in university tuition fees and utility bills.

"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. This is not the result of easy monetary policy and nor does it reflect what's going on in the economy," Sir Mervyn said.

The governor opined that a UK economic recovery was within sight. He drew parallels between now and when the Bank's first inflation report was presented in 1993.

"In February 1993 unemployment had just reached its peak. Although we didn't know it at the time a recovery was on its way. Today, there is cause for optimism. Today too a recovery is in sight," Sir Mervyn said.

The inflation report suggests the UK economy was set for a "slow but sustained recovery" over the next three years, but GDP growth was unlikely to surpass its pre-global financial crisis peak until 2015 at the very least.

Sir Mervyn said the BoE stood ready for more quantitative easing (QE) if needed.

"You might be tempted to think that an above-target inflation forecast justifies a tighter monetary policy, and certainly ensuring that inflation returns to target in the medium term is our primary responsibility and objective," he said.

"But the bank's remit is to deliver price stability in the medium term in a way that avoids undesirable volatility in output in the short run. The prospect of a further prolonged period of above target inflation must therefore be considered alongside the weakness of the real economy," he added.

However, the governor cautioned that more QE was not a cure-all. "We must recognise, however, that there are limits to what can be achieved via general monetary stimulus - in any form - on its own," he said.

The UK central bank has so far spent £375 billion on buying government bonds but has refrained from increasing the QE programme.

BoE also noted that there was growing evidence of its Funding for Lending Scheme (FLS) helping private sector credit conditions, but it was too early to draw clear conclusions.

Earlier, ratings agency Moody’s noted that the downside risks facing the global economic recovery have diminished since the end of last year, but that a slow pace of economic growth is still likely in many economies including the UK.

In its latest macro-risk report, Moody’s opined that with the US having avoided the full scale of potential disruption implied by the so-called 'fiscal cliff', the easing of financing stresses in the Eurozone, and increasing signs that key emerging markets will avoid a hard landing, there are now fewer potential stumbling blocks on the path to global recovery.

However, the agency cautioned that the balance of risks to the macro outlook still remained skewed to the downside, stemming from a deeper (than currently expected) recession in the Eurozone, accompanied by deeper credit contraction, particularly if triggered by a further intensification of the sovereign debt crisis.


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