LONDON (Thomson Financial) - The Bank of England provided a clear indication that UK borrowing costs are likely to fall again soon but warned that above-target inflation may limit the number of rate cuts it can enact.
In its quarterly Inflation Report, the central bank said the annual CPI inflation rate could well rise above 3.0 pct in the near term if rates fall as expected, but that its central projection is that it will peak around 2.9 pct sometime in the second quarter.
It blamed higher energy, food and import prices for pushing inflation up sharply in the near-term. The last figures for the year to January showed the annual CPI rate at 2.2 pct.
If inflation rises above 3.0 pct, the governor Mervyn King would have to write his second explanatory letter to the Chancellor explaining why inflation had risen by more than one percentage point from the 2.0 pct target.
After the initial spike, the BoE reckons that inflation will then ease back to around 2.2 pct in the medium-term as the near-term rise in energy prices drop out of the 12-month rate and capacity pressures moderate.
The central bank said its profile for inflation is somewhat higher than in its last projections in November, particularly in the near-term. In November, the BoE predicted that inflation would peak at only around 2.3 pct by mid-2008.
Its central projection is based on the benchmark Bank Rate falling to 4.50 pct by the end of 2008 and easing further to 4.40 pct in 2009 before rising slightly back to 4.50 pct at the start of 2010.
If the Bank Rate were unchanged at the current 5.25 pct, the BoE said inflation would likely settle below the 2.0 pct target on the two-year forecasting horizon.
The projections suggest that the BoE thinks borrowing costs may fall another 50 basis points in the coming months but that expectations of three quarter point rate cuts may be overdone.
On growth, the BoE said a recession in the UK is very unlikely even if borrowing costs are unchanged.
However, it did say that the economy's growth prospects have weakened substantially. It is now projecting annual GDP growth dipping below 2.0 pct in 2008 to around 1.75 pct at market rates, primarily because tighter credit conditions and weaker real income growth bear down on domestic demand and household savings rates would increase.
Growth then starts to recover, according to the BoE, as credit conditions improve and the effects of lower interest rates and the weaker pound work through to boost net trade.
At unchanged rates, the BoE sees the annual rate of GDP growth dipping to around 1.5 pct.
The central bank said the projected growth slowdown is "somewhat deeper and more prolonged" than in the November Report when it still expected growth to be above 2.0 pct during the two-year forecasting horizon.
As usual, the BoE said there are "substantial" uncertainties surrounding its central projections.
On the downside, it noted the potential for a greater tightening in credit conditions and the associated impact on demand at home and abroad.
On the upside, it noted the possibility that the short-term rise in inflation leads to a more persistent rise in medium-term inflation expectations, which it said will be one of the key themes looked at by the rate-setting Monetary Policy Committee in the months ahead.
Overall, the BoE said the risks to growth are to the downside while those to inflation are balanced, unchanged from the November report.
The BoE conceded that there is a range of views on the MPC, which signed off on the projections, on both the central projection and the balance of risks.
"The combination of slow growth and above-target inflation poses substantial challenges for policy," the BoE conceded.
Tidak ada komentar:
Posting Komentar