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Pastimes : The Hot Button Questions:- Money, Banks, & the Economy -- Ignore unavailable to you. Want to Upgrade?

To: maceng2 who wrote (570)	2/11/2004 1:43:04 PM
From: maceng2	Read Replies (1) \| Respond to of 1417

Bank of England sees inflation picking up Wed 11 February, 2004 13:58 reuters.co.uk By Sumeet Desai and Anchalee Worrachate LONDON (Reuters) - Britain's economy is set to grow rapidly over the next two years and inflation will pick up, the Bank of England says, reinforcing the view that interest rates will rise again before too long. Only a week after the central bank lifted borrowing costs for the second time in three months, Governor Mervyn King noted on Wednesday that though inflation was seen at its 2.0 percent target in two years, it was expected to keep rising after that. Moreover, policymakers remained worried about the speed at which house prices and household debt are rising, increasing the probability of a crash in consumer spending. The pound neared an 11-year high against the dollar and held close to a 10-month peak on the euro while interest rate futures fell after the BoE's quarterly inflation report as it made dealers more confident further monetary tightening was in the pipeline. "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 CPI within its target over the medium term," said Kit Juckes at RBS Financial Markets. "I wouldn't be surprised to see another rate rise around the time of the May inflation report." The BoE raised interest rates by a quarter-point to 4.0 percent last week, citing recovery in the global economy and continued strength in consumer debt and house prices. BULLISH GROWTH The BoE report showed economic growth was expected to pick up even further above its trend-rate, rising at a rate of more than three percent for most of the next two years. Indeed, figures out on Wednesday showed unemployment fell by 13,400 in January, its biggest drop in 2-1/2 years, to a rate of just 2.9 percent -- its lowest since June 1975 And inflation, though now running well below its 2.0 percent target, was seen accelerating by the BoE through this year and next. "It is crucial to bear in mind that, in the central projection, inflation is continuing to rise at the two-year horizon," Governor King told a news conference. But analysts said the BoE seemed more pre-occupied with the possibility of consumer spending crashing than just a build-up of inflation. "We believe the last move in rates was more to do with curbing consumers' appetite for debt rather than the prospect of an imminent inflationary threat that materialises in 2006," said John Butler, UK economist at HSBC bank. The BoE warned again house prices were rising at an unsustainably rapid rate and that it was too early to say whether the recent record increases in unsecured borrowing were turning down in any significant manner. It said it had underestimated both consumer spending and house prices recently. Both had turned out stronger than expected, increasing "the chance of a sharper correction to house price inflation and consumption growth at a later date." Another risk was the large U.S. current account deficit could provoke further falls in the dollar. A consequent rise in the euro could derail recovery in the euro zone and pull back the projected growth forecasts for the world economy. And sterling's trade-weighted rise since November had already dampened the BoE's forecasts for growth next year as it would likely damage exporters' competitiveness. The BoE was also worried that the recent rise in taxes could lead to higher wage demands, pushing up inflation.