Uncertain inflation forecasts from Bank
BUSINESS leaders have urged the Monetary Policy Committee to keep a second round of quantitative easing amid uncertainty from the Bank of England over future inflation trends.
The Bank’s latest inflation report suggests that CPI will stay above the 2% target next year before falling back although the pace of that reduction is “highly uncertain”.
David Kern, chief economist at the British Chambers of Commerce, said: “The new Inflation Report, and subsequent comments by the Bank Governor, suggests that the MPC is expecting inflation over the next two years to be higher than they predicted in August, and growth to be slightly higher than the historical average. On the basis of this assessment, the prospect of an early increase in QE has diminished.
“However, due to the risks facing the economy, we believe it is important for the MPC to keep the possibility of adding to the QE programme under active consideration, while keeping interest rates at very low levels for an extended period.
“The growth forecast in the Inflation Report could be over-optimistic in our view, and may not fully take into account the negative effect that the Government’s deficit cutting plan will have on the economy. Businesses and consumers will face serious pressures in the months ahead, and it is important to ensure that risks of a downturn are averted as a matter of priority.”
The report suggests that if the bank rate moves in line with the markets and QE remains unchanged the chances of inflation being above or below target in 2013 is “roughly equal”.
Graeme Leach, chief economist at the Institute of Directors, said: “Uncertainty is written all over this report, and rightly so. There are so many competing forces towards sustained recovery or recession, the economic models are overwhelmed. This can be seen in the Bank’s statement that the odds of above or below target inflation are roughly equal.
“Conventional economic forecasting is a wasted exercise in a world of unconventional monetary policy and huge disagreement over the size and sign of fiscal multipliers in the wake of the financial crisis. This is a time for judgement and the IoD agrees with the Governor of the Bank of England that the Spending Review is unlikely to trigger a double-dip recession, quite the contrary, it is probably the most important step in sustaining recovery.
“Our deeper concern is that the problems in the banking system will continue to plague economic activity but that inflation uncertainty would delay the launch of QE2 in 2011. We will never know how the recession would have unwound if the original introduction of QE had been in 2008 and not 2009. Let’s hope we don’t make the same mistake twice.”
