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Bank governor sees inflation at present level til next year - stagflation
Inflation should fall below the central bank's 2% target in two years if interest rates stay at 5%, the Bank of England said today, prompting markets to price in a rate cut by year-end.
The Bank's quarterly Inflation Report showed the CPI rate spiking close to 5% before falling back dramatically as the effects of higher food and fuel prices wane and the economy grinds to a standstill over the next year.
"The next year will be a difficult one, with inflation high and broadly flat. But with monetary policy focused on its task of bringing inflation back to the target, we will come through the adjustment," Bank Governor Mervyn King told a news conference.
The Bank's central forecast is for inflation to stand just below the 2% target if rates move in line with the market yield curve. This assumes borrowing costs staying almost flat over the next year.
Risks to the inflation forecast are on the upside, the Bank said.
As regards the resilience of the banking system the Bank said:"Attention is now turning away from liquidity and more towards questions of funding and viability of an institution's business plan."
"For some institutions, that means they are over the worst and for other perhaps not. But I think we have certainly moved some long way down the road."
MPC member Paul Tucker said:"Libor rates will probably stay relatively high relative to the policy rate for some time. Financial markets are expecting them to edge down over the next year or so. This is precisely the backdrop to the adjustment we are seeing in bank balance sheets."
Markets immediately moved in to price in a greater than even chance of a rate cut by the year-end -- rates futures surged by up to 20 ticks across the 2008-09 strip as dealers brought forward the timing of anticipated rate cuts.
Most analysts had previously expected the Bank would wait until next year before cutting rates as inflation is currently running at a series-high of 4.4%, more than double the central bank's target.
"The tone is clearly dovish, with the economy now expected broadly to stagnate over the next year or so," said Jonathan Loynes at Capital Economics.
"Against that background, we stick to the view that interest rates will eventually fall very sharply once inflation pressures finally recede. Market rate expectations therefore have scope to fall much further in time."
The Bank saw GDP "broadly flat over the next year or so", before picking up quickly to a rate of around 2.4% in two years. This was a lower profile than that predicted in May and the central bank said risks remained on the downside.
"The housing market is weaker and credit supply conditions are tightened by more than was assumed in May," the Bank said.
Data earlier on Wednesday showed the number of people claiming jobless benefits rose by 20,100 in July, the biggest increase since December 1992.
The Bank's quarterly Inflation Report showed the CPI rate spiking close to 5% before falling back dramatically as the effects of higher food and fuel prices wane and the economy grinds to a standstill over the next year.
"The next year will be a difficult one, with inflation high and broadly flat. But with monetary policy focused on its task of bringing inflation back to the target, we will come through the adjustment," Bank Governor Mervyn King told a news conference.
The Bank's central forecast is for inflation to stand just below the 2% target if rates move in line with the market yield curve. This assumes borrowing costs staying almost flat over the next year.
Risks to the inflation forecast are on the upside, the Bank said.
As regards the resilience of the banking system the Bank said:"Attention is now turning away from liquidity and more towards questions of funding and viability of an institution's business plan."
"For some institutions, that means they are over the worst and for other perhaps not. But I think we have certainly moved some long way down the road."
MPC member Paul Tucker said:"Libor rates will probably stay relatively high relative to the policy rate for some time. Financial markets are expecting them to edge down over the next year or so. This is precisely the backdrop to the adjustment we are seeing in bank balance sheets."
Markets immediately moved in to price in a greater than even chance of a rate cut by the year-end -- rates futures surged by up to 20 ticks across the 2008-09 strip as dealers brought forward the timing of anticipated rate cuts.
Most analysts had previously expected the Bank would wait until next year before cutting rates as inflation is currently running at a series-high of 4.4%, more than double the central bank's target.
"The tone is clearly dovish, with the economy now expected broadly to stagnate over the next year or so," said Jonathan Loynes at Capital Economics.
"Against that background, we stick to the view that interest rates will eventually fall very sharply once inflation pressures finally recede. Market rate expectations therefore have scope to fall much further in time."
The Bank saw GDP "broadly flat over the next year or so", before picking up quickly to a rate of around 2.4% in two years. This was a lower profile than that predicted in May and the central bank said risks remained on the downside.
"The housing market is weaker and credit supply conditions are tightened by more than was assumed in May," the Bank said.
Data earlier on Wednesday showed the number of people claiming jobless benefits rose by 20,100 in July, the biggest increase since December 1992.
Wed, 13th Aug 2008