Bank of England offers glum outlook for 2013

LONDON Wed Dec 19, 2012 4:12pm GMT

Busses pass the Bank of England in the city of London November 26, 2012. REUTERS/Olivia Harris

Busses pass the Bank of England in the city of London November 26, 2012.

Credit: Reuters/Olivia Harris

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LONDON (Reuters) - The economy is likely to remain stagnant in the near term but inflation will probably exceed 2 percent in the next year and also faces further risks from higher food prices, Bank of England policymakers said on Wednesday.

After its December 5-6 meeting, the BoE's Monetary Policy Committee decided to keep its main interest rate at a record-low 0.5 percent and its bond purchases at 375 billion pounds as expected, with stubborn inflation trumping worries about a sluggish economy.

Wednesday's minutes showed that David Miles was again the only MPC member to support another expansion of the asset purchase programme, arguing that there was enough slack in the economy to allow higher output without extra inflation. He voted for a 25 billion-pound top-up.

"Most members agreed that developments on the month had done little to alter the balance of arguments between maintaining and increasing the size of the monetary stimulus," the minutes said.

There was little market reaction to the release.

Philip Shaw, economist at Investec, said it would probably take another two months of data to shift arguments over more quantitative easing one way or another.

"It's possible that the committee's commentary over the economy from early next year becomes a little less downbeat," he said. "Our central view is that the MPC will refrain from sanctioning any further QE over 2012 but clearly that's subject to economic developments."

In November the Bank agreed to return to the finance ministry coupon payments on the gilts it had bought so far, saying the transfer would be equivalent to more than 35 billion pounds' worth of monetary easing.

However, in the minutes the central bankers said the monetary impact of the transfer would be slightly smaller in the very short term than initially assumed, because it had led to a reduction in the issuance of Treasury bills rather than gilts.

"The committee agreed that an early understanding of the government's gilt issuance plans for the 2013-14 financial year would be helpful for its monetary policy decisions," they said.

Some parliamentarians and economists have criticised the deal, saying it potentially threatened the BoE's independence.

Q4 CONTRACTION

The minutes said economic output was likely to be broadly flat in the near term, but there would probably be a contraction in the fourth quarter.

Dangers from the euro zone had eased, although uncertainty about U.S. budget talks posed risks.

"The deterioration in UK competitiveness over the past couple of years represented a potential headwind to the ability of UK exporters to benefit from a pick-up in global growth," the minutes said.

The Bank also said that inflation was likely to remain above its 2 percent target for the next year or so, though food prices could be driven up by bad weather disrupting planting.

Inflation held at 2.7 percent in November, its highest since May, confounding forecasts for a dip.

Last week MPC member Paul Fisher told Reuters he would wait for signs inflation was coming down before voting to extend QE, though he added that more gilt purchases would probably be needed to keep policy accommodative.

The Bank chief economist Spencer Dale has warned that inflation was unlikely to fall back to target for some time, and the BoE's own forecasts do not see inflation below 2 percent until the third quarter of 2014.

Economists polled by Reuters do not expect any change in interest rates until then, and put the chance of more asset purchases at just 40 percent. ($1 = 0.6155 British pounds)

(Editing by Patrick Graham)

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Comments (3)
DR9WX wrote:
As a Systems Analysis and Design (SAD) Engineer, I am familiar with designing control systems for dynamic systems. The Global Financial System is a massively complex dynamic system.

Unfortunately, economists believe that it isn’t. Economists believe that it is inherently stable and just moves from one point of equilibrium to another.

To be more specific, the Heads of the big central banks don’t know that they don’t know how the Economy works. I am horrified.

The man in the street is not horrified, he knows that the bankers are having a laugh at his expense.

The Government are no better, with their deficit spending. The people are worse, the people demand Government deficit spending. I watch the farce with great interest, do please carry on.

Dec 19, 2012 2:10pm GMT  --  Report as abuse
allritejack wrote:
Inflation held at 2.7 percent in November. Are there no ‘shadow statistics’ over there. Try 4% for the actual inflation and 0.5% for bank interest and you have a devaluation of the GBP of 4% pa. Nice

Dec 19, 2012 4:13pm GMT  --  Report as abuse
DR9WX wrote:
For the curious but mathematically challenged, 4% inflation turns a £10 note into a £5 note in 18 years. (In terms of purchasing power.)

Providing your wages double over the next 18 years, 4% annual wage increase, you will be OK assuming you are OK now.

Good luck to one and all. Have a great Christmas – these are the good old days – enjoy them.

Dec 19, 2012 6:24pm GMT  --  Report as abuse
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