Bank of England Lifts Forecasts for Inflation, Growth

Nov. 11 (Bloomberg) -- The Bank of England raised its forecast for economic growth and said inflation may exceed the 2 percent target in 2012 even if policy makers start increasing interest rates from a record low.
The central bank signaled that the U.K. economy has starting expanding again and won’t slip back into a recession, according to quarterly predictions published in London today.
The Bank of England last week expanded the bond-purchase plan to reach 200 billion pounds ($335 billion), saying that the economy will endure a “slow recovery.” The bank said today that third-quarter gross domestic product data showing the economy stayed mired in its longest recession on record will probably be revised up.
“The outlook for inflation in the medium term is somewhat higher than in the August report, reflecting the stronger projected distribution for GDP growth,” the bank said. “The risks of inflation being above or below target are broadly balanced by the end of the forecast period.”
The pound fell after the report, declining as much as 0.5 percent to $1.6703. The yield on the two-year U.K. government bond slipped two basis points to 0.8 percent.
The central bank’s forecasts are published as fan charts. They are based on the outcome for the economy if the benchmark interest rate, currently at 0.5 percent, rises to meet market expectations of an average of 1.1 percent in the third quarter of 2010 and 2.1 percent in the first quarter of 2011.
Inflation Forecast
The forecasts show that inflation will reach about 1.6 percent at the end of the central bank’s normal two-year time horizon. The rate will just exceed the target by the middle of 2012, the fan charts show.
The inflation rate dropped to 1.1 percent in September from 1.6 percent the previous month to the lowest in five years as the recession purged cost pressures throughout the economy.
“Inflation looks set to rise sharply in the near term,” the bank said. “Further out, downward pressure from the persistent margin of spare capacity was likely to bear down on inflation for some time to come.”
The weakness of the pound and the end in January of a reduction in sales tax designed by Chancellor of the Exchequer Alistair Darling to stimulate the economy will push up inflation next year, the bank said. Darling will make his next pre-budget statement to Parliament on Dec. 9 at 12:30 p.m. London time, the Treasury said in a statement today.
The Bank of England’s 25 billion-pound expansion of the bond-purchase plan this month was the smallest of three since the program started in March. Central banks agree on the need for a “timely and gradual phasing out” of extraordinary measures introduced to ward off a depression, European Central Bank President Jean-Claude Trichet said this week after a meeting of global policy makers in Basel, Switzerland.
To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Scott Hamilton in London at