Sir Mervyn King now expects inflation, currently at 2.7 per cent, to rise to at least 3 per cent by the summer and to remain above the Bank's 2 per cent target for two years, whereas last year he said that it would fall back towards its target in the second half of this year.
According to the Governor, factors such as higher utility bills and university tuition fees, that are outside the Bank’s control, had added to inflation recently and there is nothing the Bank can do to make a difference.
However, Sir Mervyn King said that he could see a “more encouraging underlying picture” amidst the flat data experienced of late. He said that the two bulwarks of the economy, manufacturing and services, grew last year, which is a good sign and that the weakness in overall output reflects falls in the construction sector, which he feels is unlikely to be repeated this year.
Therefore, his prediction is for growth in the near future, albeit weak, while further down the line, a continued easing in domestic credit conditions, supported by the Bank's asset purchase programme and the Funding for Lending Scheme, together with the stronger global backdrop, will underpin a slow but steady recovery in output.
Because of these external factors, the Governor concluded that there is no point in attempting to bring inflation back to target sooner, as this would only risk derailing the recovery.
For more information, please contact Glazers, Chartered Accountants London or visit www.glazers.co.uk
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