Feb 13 2013
Households and savers are facing more misery after the Bank of England signalled another three years of emergency low interest rates and above-target inflation.
Bank governor Sir Mervyn King warned inflation was now expected to remain "stubbornly" high until early 2016, but indicated there was little prospect of interest rates rising as it sought to support recovery efforts.
The pound slumped to a fresh six-month low against the dollar and dipped nearly 1% against the euro after the Bank's latest forecast, despite assurances from Sir Mervyn that a "recovery is in sight".
Presenting the bank's quarterly inflation report, he said that while the path ahead for the UK economy would not be smooth, there was cause for optimism.
The bank's forecast shows a "slow, but sustained recovery" with annual gross domestic product (GDP) rising to around 2% by the end of 2014 and remaining in positive territory, boosting hopes that the UK will avoid a triple-dip recession.
But its inflation outlook made for grim reading as it heralded a further squeeze on consumers, while savers and pensioners look set to suffer rock-bottom rates for years to come. Inflation is now expected to rise to 3% or more by the summer and not fall back towards the 2% target until 2016.
The bank has been criticised for failing to bring inflation down to target since the financial crisis, but Sir Mervyn said: "Attempting to bring inflation back to target sooner would risk derailing the recovery and undershooting the target in the medium-term."
His comments come just a week after incoming governor Mark Carney told MPs he favoured so-called flexible inflation targeting. Philip Shaw, chief economist at Investec Securities, questioned whether the Bank could become more flexible with its monetary policy.
He said: "With inflation above the 2% target for 90% of the time over the past five years, the Monetary Policy Committee has already been flexible. How this might become even more flexible is not clear at all."
Currency expert Eimear Daly, head of market analysis at Monex Europe, said: "The most likely conclusion is that the Bank of England will use monetary easing to devalue the pound in order to boost exports, as private demand is now immune to further quantitative easing."