UK Inflation “Ups and Downs”

The Bank of England’s quarterly inflation forecast out today suggests an RPI peak over 3.5% in the next quarter, but then a rapid fall to below 1% in 12 month’s time.

What I found quite telling was its prediction of inflation if market expectations of interest rates hold true. That showed a much weaker outlook for prices, with inflation still below target even in 2013. I reckon this calls into question recent consensus economist opinion of dramatic rate rises from Q4 and now points to a more prolonged period of low interest rates.

In terms of the Bank’s quarterly forecasts for economic recovery - which I am sure politicians are avidly watching out for – the Bank’s Governor, Mervyn King, said that the path for growth was little changed from the last report in November.  On the one hand, the recovery was likely to be weaker than previously thought but on the other the downside risks to growth in the future were smaller.

There were no particular clues about Quantitative Easing being considered further, other than a repetition of what was said after base rates were reviewed by the MPC recently; in other words its a “pause” not necessarily an end to money creation.