InvestmentsMay 29 2013

Bank of England forecasts higher inflation

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ByDaniel Liberto

Bank of England governor Mervyn King’s last inflation report bodes well for the future costs of borrowing and equity markets, but savers will be less enthusiastic.

Sir Mervyn predicted that inflation is likely to edge higher in coming months – in the worst-case scenario it could even hit 5 per cent – but will then come down quicker than initially expected.

Brigid Benson, director of Gaeia Partnership, said inflation is restricting low earners from getting advice and saving, but is good news for investment markets.

“Stockmarkets have roared again because both US and UK governments are happy to keep interest rates below inflation and encourage investment in equities,” she said.

“Company dividends in a well managed, diversified fund can easily provide an income in excess of inflation, with the long-term potential of capital growth.”

After years of above-target inflation caused by quantitative easing, many advisers are unsure if the Bank of England’s (BoE) statement can be trusted.

“Any inflation predictions from the BoE must always be considered with some element of caution, given how inaccurate they have been in the past,” said Warren Bentham, an IFA at 75point3.

However, Mr Bentham said he is confident the longer-term rate of CPI inflation will drift back to around the 2 per cent figure, which he said will stimulate the UK economy.

“The expected extended term of record-low interest rates, until late 2016, will provide some security to both households and companies as to the future cost of borrowing,” he said.

“It will also assist in stimulating the level of spending in the economy and allowing our clients to continue to enjoy relatively low borrowing costs on both their mortgage liabilities as well as within their businesses.”

Mr Bentham said markets are already benefiting from the latest inflation outlook, with the FTSE 100 responding positively to the report.