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To: sciAticA errAticA who wrote (33591)	5/12/2003 11:16:46 AM
From: sciAticA errAticA	Read Replies (1) \| Respond to of 74559

(UK) Bank heads for gloomy inflation forecast By Christopher Swann, Economics Correspondent Published: May 11 2003 21:57 \| Last Updated: May 11 2003 21:57 The Bank of England's inflation report is likely to show a significant risk of inflation rising above 3.5 per cent - the level at which the governor would have to explain his failure to the chancellor - leading forecasters said on Sunday. If the Bank's forecast for inflation, published this Thursday, remains relatively high for a prolonged period, it will send a clear signal to the market, homeowners and manufacturers that interest rate cuts are much less likely and that the next move is likely to be upward. The threat stems largely from the recent slide in sterling, which has fallen more than 7.5 per cent in trade-weighted terms since the Bank last forecast inflation and growth in February. This puts upward pressure on prices, both by raising import prices and lifting economic growth. The Bank will also have to factor in an unexpectedly large rise in council tax of almost 13 per cent. HSBC said this would provide another fillip to inflation, raising underlying inflation by about 0.2 percentage points. Only a slightly faster than expected fall in oil prices would counter these inflationary developments, economists said. With inflation at 3 per cent in March, well above the 2.5 per cent target, most economists believe the inflationary menace posed by the falling pound was the main reason the Bank kept rates on hold at their meeting last week. Ray Barrell, an economist at the National Institute of Economic and Social Research, said the fall in the pound could add about 0.4 percentage points to inflation by the end of 2004. "This creates a very substantial risk it will overshoot the 3.5 per cent level," he said. Peter Spencer, economic adviser to the Ernst & Young Item club, which uses the government's economic models, said that if sterling continued to weaken, the Bank may have to be less fastidious about hitting the inflation target. The central problem for the Bank, he said, was that the fall in the pound would feed through into inflation very quickly as import prices climbed, while any rise in interest rates would take at least six months to help bring inflation under control. He said the output gap - a measure of the spare capacity in the economy - was smaller than the government thought. With less slack in production capacity, prices could rise quickly as demand picked up. The Bank could use the rise in council tax to justify any overshoot in inflation to the chancellor. news.ft.com