13 February 2002, 09:31 OUTLOOK - BoE report today to chart higher course for inflation
LONDON (AFX) - Today's Bank of England inflation report is likely
to chart a modestly higher course for prices than its November edition
amid budding signs of increased price pressures, according to
economists.
A gently higher inflation profile not only shortens the odds for UK
interest rate rises later in the year as a global recovery kicks in, it
also quashes further rate cut hopes, economists said.
Further, BoE governor may also be saved the embarrassment of having
to write to the Chancellor explaining an undershoot of the 2.5 pct
inflation target, they added.
Yesterday's unexpected rise in RPI-X inflation (RPI excluding
mortgage interest payments) - the measure of inflation targeted by the
Bank of England - was a case in point. The January measure rose at its
fastest rate since March 1999, confounding expectations for a 2.1 pct
gain.
The 2.6 pct year-on-year rise in January also exceeded the BoE's
2.5 pct official target.
David Page, economist at Investec, said yesterday's markedly higher
January RPI-X rate led him to alter previous estimates.
"Previously, we viewed the profile as gently increasing but from a
very low base. Clearly now we see it from a slightly higher base
although perhaps not from the 2.6 pct seen in January," he said.
The net effect is an inflation profile which is liable to be closer
to or around the 2.5 pct target over the two-year horizon rather than
just slightly below as previously anticipated, Page added.
If anything, the profile will be modestly higher than the November
edition, he said.
It must be noted that not all of January's rise in the RPI-X
measure can be explained away by base effects, Page said.
"Yes, for some of it, for instance petrol but elsewhere discounts
in sales have not been as deep suggesting that there is a little bit
more pricing power on the high street," he added.
Further, there are significant rises in gas prices which will
remain in the equation for some time, Page said.
"Unfavourable base effects meant that inflation was always going to
rise in January, but the scale of the increase was wholly unexpected,"
according to Ross Walker at the Royal Bank of Scotland.
While the rises in motoring and seasonal food prices are likely to
be one-off, there is ample evidence of demand led pressure on
inflation, he noted.
John Butler, economist at HSBC, said since the BoE's last set of
forecasts in November, almost every global indicator has come in
stronger than expected.
The concerns are that global demand bounces back stronger than
expected while UK consumer spending stays buoyant. Under that
environment inflation will be expected to rise further, increasing the
risk that interest rate rises come earlier and more aggressively than
the market expects, he said.
But he believes weak global inflation will keep a lid on goods
price inflation and leading RPI-X inflation lower gradually over the
next six months.
"However, we do expect less of a fall in inflation than in either
Europe or the US during the course of this year due to the fact UK
economic growth has slowed less," he said.
In any case, the BoE is likely to have incorporated the January
inflation figures into its forecasts. While this may not change its
central projections, the risk scenario is now certainly skewed to the
upside, Butler said.
Ross Walker, economist at the Royal Bank of Scotland, said the
January inflation data resolves the potential policy quandary
surrounding the appropriate policy response to an undershoot in
inflation.
"The Governor can put his pen and letter paper back in the drawer,"
he said, meaning that BoE governor Eddie George will not have to write
to the Chancellor explaining the reasons for inflation falling below
the 2.5 pct target.
© 1999-2024 Forex EuroClub
All rights reserved