BoE Sees Inflation and Weaker Growth In UK

The Bank of England (BoE) said in its report today that the UK’s inflation is likely to remain above its 2 percent target for at least another year, while growth will be subdued and vulnerable to the euro zone debt crisis. The central bank sees inflation at about 1.6 percent in two years time.

The Bank’s forecasts represent a much slower fall in inflation than it predicted back in February as well as a weaker growth outlook. It said that the UK growth is likely to remain subdued in the near term, due to the government’s fiscal squeeze, the pace of the global economy and tighter credit conditions. The euro zone debt crisis remains the biggest threat to Britain.

Reports this month indicated that UK manufacturing and services weakened in April after the economy shrank 0.2 percent in the first quarter.

Britain’s economy suffered its biggest contraction since the 1930s in the wake of the 2008 financial crisis, and had recovered less than half the output lost before it slipped back into recession at the end of 2011. The BoE said that total GDP would not get back to its pre-crisis level before 2014.

On a positive side, the UK’s jobless rate decreased slightly to 8.2 percent in March, pointing to some underlying resilience in the economy. According to the Office for National Statistics, the number of Britons without a job fell by 45,000 in the three months to March to 2.625 million.

The BoE held its key rate at a record low of 0.5 percent in May and kept its bond-purchase target at 325 billion pounds. Many economists do not expect further quantitative easing in the immediate future, but this could change if the conditions in the euro zone deteriorate. The Bank said that despite the changes in the near term outlook, the fundamental policy remained the same.

Sources: Bloomberg and Reuters

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Kenny Fisher

Kenny Fisher

Currency Analyst at Market Pulse
Kenny Fisher joined OANDA in 2012 as a Currency Analyst. Kenny writes a daily column about current economic and political developments affecting the major currency pairs, with a focus on fundamental analysis. Kenny began his career in forex at Bendix Foreign Exchange in Toronto, where he worked as a Corporate Account Manager for over seven years.