Bank of England warns of two years of stagflation
By Edmund Conway
11:20pm BST 10/05/2008
The Bank of England will this week admit for the first time that it is set to breach its inflation target in the coming months and warn that Britain is destined for two years of soaring costs and weak growth.
Mervyn King, the Bank’s Governor, is poised to unveil new forecasts showing that the Consumer Price Index (CPI) will rise above 3 per cent over the next six months, forcing him to write a letter of explanation to the Chancellor. In a further blow to Alistair Darling’s credibility, the Bank will cut its economic growth forecasts for both this year and next.
A Bank of England street sign: Bank of England warns
of two years of stagflation
The shocks facing the UK remain severe
The changes will spark fears of « stagflation » - weak growth twinned with high inflation - and will be unveiled in the Bank’s quarterly Inflation Report on Wednesday, which will set the tone for the economy for the next three months. They come amid warnings that Britain now faces a US-style housing crash, with plummeting prices and rising repossessions.
The Budget forecast that the economy would grow by 2 per cent this year and 2.25 per cent next, but the Bank is likely to forecast growth of well below 2 per cent in both years.
Despite the higher rate of inflation, the Bank is likely to indicate its readiness to cut borrowing costs again at least once - perhaps twice - in the coming months.
Although the Bank is duty-bound to keep the CPI within
a percentage point of its 2 per cent target, it will
this week forecast that the index will rise above 3
per cent in the coming months, economists predict. It
will be the second time that the Bank has missed its
target. However, Michael Saunders of Citigroup said
that this time the Governor would insist that the
increase had not come as a surprise.
Warning that the Bank would raise the inflation forecast to above 3 per cent not just for this year but also for 2009, he added: « The difficulty for the MPC [Monetary Policy Committee] and the economy is that shocks facing the UK both remain severe - downside growth from the credit crunch, housing implosion and high private debts and upside inflation risks from global cost pressures, the weak pound and surging inflation expectations. If anything, the shocks continue to worsen. »
He added: « Although details in the US and UK differ, we suspect that the UK is starting to experience a US-style housing collapse, in terms of an extended period of extreme weakness in demand, turnover and prices. »
King said in the last Inflation Report that there was a 50/50 chance of the Bank missing its target, but since then oil prices have leapt more sharply than in any previous quarter, while food prices are also on the rise. The slump in sterling is also expected to push prices higher.
Philip Shaw, the chief economist at Investec, said:
« The other worry is the spectre of further gas and electricity price increases. When utility companies move, they do so not in small increments but by big margins.
« The growth numbers will probably be a little bit lower than in February, although it’s difficult to imagine the Bank forecasting a meltdown in the economy. »
Information appearing on telegraph.co.uk is the copyright of Telegraph Media Group Limited and must not be reproduced in any medium without licence.
By Edmund Conway
11:20pm BST 10/05/2008
The Bank of England will this week admit for the first time that it is set to breach its inflation target in the coming months and warn that Britain is destined for two years of soaring costs and weak growth.
Mervyn King, the Bank’s Governor, is poised to unveil new forecasts showing that the Consumer Price Index (CPI) will rise above 3 per cent over the next six months, forcing him to write a letter of explanation to the Chancellor. In a further blow to Alistair Darling’s credibility, the Bank will cut its economic growth forecasts for both this year and next.
A Bank of England street sign: Bank of England warns
of two years of stagflation
The shocks facing the UK remain severe
The changes will spark fears of « stagflation » - weak growth twinned with high inflation - and will be unveiled in the Bank’s quarterly Inflation Report on Wednesday, which will set the tone for the economy for the next three months. They come amid warnings that Britain now faces a US-style housing crash, with plummeting prices and rising repossessions.
The Budget forecast that the economy would grow by 2 per cent this year and 2.25 per cent next, but the Bank is likely to forecast growth of well below 2 per cent in both years.
Despite the higher rate of inflation, the Bank is likely to indicate its readiness to cut borrowing costs again at least once - perhaps twice - in the coming months.
Although the Bank is duty-bound to keep the CPI within
a percentage point of its 2 per cent target, it will
this week forecast that the index will rise above 3
per cent in the coming months, economists predict. It
will be the second time that the Bank has missed its
target. However, Michael Saunders of Citigroup said
that this time the Governor would insist that the
increase had not come as a surprise.
Warning that the Bank would raise the inflation forecast to above 3 per cent not just for this year but also for 2009, he added: « The difficulty for the MPC [Monetary Policy Committee] and the economy is that shocks facing the UK both remain severe - downside growth from the credit crunch, housing implosion and high private debts and upside inflation risks from global cost pressures, the weak pound and surging inflation expectations. If anything, the shocks continue to worsen. »
He added: « Although details in the US and UK differ, we suspect that the UK is starting to experience a US-style housing collapse, in terms of an extended period of extreme weakness in demand, turnover and prices. »
King said in the last Inflation Report that there was a 50/50 chance of the Bank missing its target, but since then oil prices have leapt more sharply than in any previous quarter, while food prices are also on the rise. The slump in sterling is also expected to push prices higher.
Philip Shaw, the chief economist at Investec, said:
« The other worry is the spectre of further gas and electricity price increases. When utility companies move, they do so not in small increments but by big margins.
« The growth numbers will probably be a little bit lower than in February, although it’s difficult to imagine the Bank forecasting a meltdown in the economy. »
Information appearing on telegraph.co.uk is the copyright of Telegraph Media Group Limited and must not be reproduced in any medium without licence.
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