Bank governor Mervyn King: Strength of recovery highly uncertain

Wednesday 10th February 2010

The Bank of England has announced that it expects inflation to peak higher than three per cent in the coming months.

Mervyn King, the bank's governor, said prices would rise following the VAT increase, but after peaking at around 3.5 per cent, inflation would fall again, as the economy 'bounced along the bottom'.

In its quarterly inflation report, the Bank said: "The strength of the recovery is highly uncertain. It is difficult to assess with precision the impact of the unprecedented loosening in monetary policy when other significant and unusual forces are affecting the economy."

The inflation report outlined that credit conditions were likely to remain restrictive, and said that the rise in inflation last month, largely reflects the impact of one-off adjustments to the level of prices which should have only a temporary effect on inflation.

The report found: "The extent to which CPI inflation will deviate from the two per cent target in the medium term is highly uncertain. Companies' pricing decisions will depend on the timing and strength of the recovery in nominal demand."

Responding to the Bank's report, Howard Archer chief UK and European economist at IHS Global Insight said: "The report comes across as pretty dovish, being less optimistic on growth than was the case in the November report and still seeing inflation falling back appreciably despite spiking up more in the near term than had previously been expected.

"Bottom line - further quantitative easing is highly possible, particularly if the economy falters markedly over the coming months. And any interest rate hikes are clearly off the agenda in at least the near term, and could very well be delayed until 2011. Furthermore, when they finally do start, interest rate hikes are likely to be only gradual."

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