why do you think the UK recovery will stall.
Europe in general as well?
The UK recovery seems to be running on a wing and a prayer. It's fragile. A strong UK pound on an already strong euro has to lead to problems with the UK's exports. The Guardian reports...
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As usual, the Bank cautioned that there were considerable risks to its projections
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Bank predicts inflation rise
Mark Tran
Wednesday February 11, 2004
Inflation and economic growth will pick up this year, the Bank of England predicted today, laying the groundwork for more interest rate rises in the coming months.
In its latest quarterly inflation report, the Bank said inflation, using the new consumer prices measures (CPI), will move up in the middle of this year, partly from higher utility prices, and continue to edge up to its 2% target. Inflation at the moment is well below target at 1.3%.
The central bank also revised up its growth forecast over the next two years. Gross domestic product is seen picking up this year, sustained by continued consumer spending, a pick-up in public spending and a steady revival in business investment.
The Bank sees growth of more than 3% over the next two years before a slight slowdown as the recent strength of the pound begins to hit exports. The Bank again warned that house prices were rising too fast.
"Housing market activity has been steady and house prices have continued to rise at an unsustainably rapid rate," the Bank report said.
Analysts said the tone of the report confirmed sentiment that more interest rate rises are in store this year.
"The inflation report would seem to indicate that further rate rises will be necessary to slow the pace of house price inflation and to keep HICP (harmonised index of consumer prices) within its target over the medium term. I wouldn't be surprised to see another rate rise around the time of the May inflation report," Kit Juckes of Royal Bank of Scotland Financial Markets, told Reuters.
The Bank last week raised rates to 4%, its second increase in three months, citing continued strength of consumer spending and the housing market boom. Most analysts see the base rate rising to 4.75% at the end of the year and peaking at 5-5.25% early next year.
As usual, the Bank cautioned that there were considerable risks to its projections, especially concerning volatility in exchange rates. Like most central banks, Threadneedle Street has been monitoring closely the fall of the dollar and its implications for the world economy.
The dollar this week continued to fall, despite comments at the weekend from G7 finance ministers meeting in Florida on their commitment to prop up the American currency. Trade figures out yesterday showed that UK exports were holding up to the US, but there are worries that they will be eventually be hit as the pound - currently just below $1.9 - closes in on the $2 mark.
The Bank is also worried that the euro's rise against the dollar will hurt eurozone exports and by extension the fledgling recovery in continental Europe. That would have negative consequences for the UK as most of its exports go to Europe. Yesterday's trade figures showed a record UK trade deficit with the eurozone for December.
Mervyn King, the Bank's governor, said of today's inflation report: "Last May I said that the committee's central view might be described as positively Panglossian. Some of you might think this is equally true of today's projection with the central view of above trend growth and low inflation. But it is crucial to bear in mind that, in the central project, inflation is continuing to rise at the two-year horizon and that the risks, although broadly balanced, are nevertheless considerably in both directions. What this means for policy only time will tell." |
