InvestmentsMay 15 2013

Bank of England predicts “modest” UK recovery

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The Bank of England has kept its inflation target at 2 per cent, and forecasts growth of 5 per cent in the second quarter on evidence the UK economy has “turned a corner”.

“Of most significance today is that there is a welcome change in the economic outlook. Today’s projections are for growth to be a little stronger and inflation a little weaker than we expected three months ago,” Mr King said in his opening statement of the quarterly inflation report.

“But this is no time to be complacent – we must press on to ensure a recovery and bring down unemployment.”

The improved outlook for the second quarter follows the unexpected 3 per cent GDP growth recorded for the first three months of this year, while the Bank’s growth forecast for 2013 as a whole has been revised from 0.9 to 1.1 per cent.

Inflation has steadily climbed in the past year and currently stands at roughly 2.8 per cent. At a press conference, the governor said he was “not happy with the present situation but it doesn't follow that the best thing is to push inflation rates higher and send us back in to recession.”

The inflation report maintained that “inflation is likely to fall back towards the target as external price pressures fade and a gradual revival in productivity growth curbs domestic cost pressures,” and forecast a return to 2 per cent inflation on the consumer prices index in the next two years.

In spite of the optimism displayed by the governor, Samuel Tombs, economist at Capital Economics, thinks that the Bank will step up its bond buying programme later in the year.

“Mark Carney’s previous comments suggest that he is prepared to take an even more flexible approach to the inflation target, while we doubt that the economic recovery will live up to the MPC’s expectations. Accordingly, we doubt that QE has reached a limit,” he said.