LONDON (Reuters) - British inflation will fall sharply over the next six months to hit its 2 percent target by the end of 2012, as a deteriorating global economic outlook weighs on the economy, Bank of England governor Mervyn King said on Tuesday.
In a letter to Chancellor George Osborne that he was obliged to write after official data showed inflation came in at 5.0 percent in October, King said the economic outlook had deteriorated since August and therefore warranted the Bank’s decision to inject 75 billion pounds of stimulus in October.
“It is also possible that inflation could fall back more sharply given the existing margin of spare capacity in the economy, the substantial risks around the global economic recovery and the implications of a further slowdown in the world economy for the United Kingdom,” he wrote.
Inflation eased in October, but has remained well above central bank’s 2 percent for almost two years.
King said he expected inflation to fall to around the target by the end of next year, but said the pace and extent of the decline was uncertain.
He repeated that temporary factors were driving up prices and that inflation would be below 2 percent were it not for those.
The Bank will publish its latest quarterly growth and inflation forecasts on Wednesday. The Inflation Report is expected to show inflation will fall below 2 percent over the medium term, and could indicate the central bank may need to inject further stimulus into the economy.
Responding to King’s letter, Osborne agreed that the main risks to the UK stemmed from the uncertain global economic outlook.
“The threat to the UK economy from the crisis in the euro zone is very serious,” he wrote.