Bank of England Governor Mervyn King said the recovery will persist and predicted an equal chance that inflation will exceed or undershoot the 2 percent target as officials grow more divided on the economic outlook.
“There is, as you would expect and should want, a vigorous debate between members, and a range of views that is wider than usual, about the weight to attach to those different risks,” King said told reporters in London today. He presented the bank’s quarterly predictions, raising its forecast for inflation in 2011 and predicting it will keep above the goal next year.
The Bank of England last week kept its bond-purchase plan unchanged at 200 billion pounds ($322 billion) after Britain’s economy grew twice as fast as predicted in the third quarter. The forecasts today suggested the recovery can weather the government’s budget squeeze, which is set to inflict almost half a million job cuts on the economy.
“The U.K. recovery is expected to continue, supported by expansionary monetary policy, further growth in global demand and the past depreciation of sterling,” the bank said. “The chances of inflation being either above or below the target by the end of the forecast period are judged to be roughly equal.”
Growth will exceed its historical average “for much of the forecast period,” King said.
The bank sees inflation at about 1.5 percent at the end of 2012, based on a chart of projections in the report. Gross- domestic-product growth is seen at about 3.2 percent, according to the projections. The bank said its near-term inflation forecast is higher than in August and sees consumer-price growth above its target through 2011.
“There are significant uncertainties around the outlook for inflation,” the bank said. “The near term overshoot of the target may be more pronounced, particularly if there is continued strength in commodity-price inflation.”
The central bank also said it “stood ready to respond in either direction as the balance of risks evolved.”
The pound rose 0.5 percent against the dollar after the release of the inflation report and traded at $1.60256 as of 11:10 a.m. in London. The yield on the benchmark two-year government bond was up 3 basis points today at 0.726 percent.
Inflation was 3.1 percent in September, exceeding the government’s 3 percent limit for a seventh month. King has already written three letters this year to Chancellor of the Exchequer George Osborne to explain the inflation rate and there is a “high probability” he will have to write another one, the bank said today.
On growth, the central bank said “four-quarter growth is a little more likely to be above its historical average than below it for much of forecast period.”
“Despite the significant fiscal consolidation that is now underway, the recovery in output is likely to be maintained,” it said. “But the strength of the recovery remains highly uncertain.”
A three-way split has emerged on the central bank’s Monetary Policy Committee, with Andrew Sentance maintaining a campaign he began in June for higher interest rates to control inflation, and Adam Posen arguing for more bond purchases to support the recovery. Minutes of this month’s decision will be published on Nov. 17.
While the Bank of England last week kept its policy unchanged, the U.S. Federal Reserve announced a second round of large-scale asset purchases, pledging to buy an additional $600 billion of Treasuries through June to head off the risk of deflation.
King today noted the importance of the global economy, and especially the euro area, for the U.K. economic outlook.
“Whether that recovery will be sustained depends heavily on developments in the rest of the world, as domestic spending, especially by the public sector, is likely to grow more slowly looking ahead,” he said. “Given the scale of the fall during the recession, the level of output is likely to remain weak.”
Britain’s recovery is showing some signs of momentum. Gross domestic product rose 0.8 percent in the third quarter, twice the pace forecast by economists, and surveys this month showed manufacturing and services growth accelerated in October. The statistics office said yesterday that manufacturing production expanded for a fifth month in September to reach the strongest level in almost two years.
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