Sterling strengthens on the Bank of England’s Quarterly Inflation Report
13 February 2008
Sterling promptly rose across the board this morning after the release of the BoE’s quarterly inflation report, as the market scaled back expectations for further interest rate cuts into 2008.
The Central Bank’s outlook is for higher energy, food and import prices to push inflation sharply above the 2.0% target in the near term. However, inflation should then ease back to a little over the 2.0% target in the medium term, as the near term rise in energy prices drop out of the 12 month rate and capacity pressures moderate.
The extent to which consumer prices increase will be largely dependent on whether or not businesses and retailers pass on higher factory gate prices. We have already seen a number of utility companies passing on the rising cost of fuel to consumers this year, providing additional upside risks going forward. Policy makers remain concerned that there is a real possibility that inflation could reach as high as 3.0% in the middle of this year, resulting in Mervyn King having to write an explanatory letter to the Chancellor.
The BoE highlighted that in the UK, output growth has moderated to around its long-term historical average rate and that risks to growth are weighted to the downside. The Bank forecasts growth will slow to just under 2.0% by year end, before recovering to approximately 2.5% at the end of its 2 year forecast.