13 February 2002, 13:46 BoE sees RPI-X at around 2 pct in 2002 before rising close to 2.5 pct target
LONDON (AFX) - The Bank of England said in its February Inflation
report that RPI-X inflation is likely to "bump along at around 2 pct"
in 2002 before rising to reach close to the 2.5 pct official target in
2004.
The Bank said RPI-X inflation is likely to run slightly below
target in the near term, although monthly movements are likely to
remain erratic, reflecting various one-off factors.
This remark appeared to account for yesterday's unexpectedly high
January RPI-X reading. The annual rate was at 2.6 pct, breaching the
official 2.5 pct target.
"The inflation profile is very close to that in the November
Report," the bank said.
However the Monetary Policy Committee believes that the overall
risks to inflation are on the upside, reflecting the impact of a
possible exchange rate fall on import prices.
Some MPC members prefer different views which mean the central
projection could be lower by about 1/4 percentage point or marginally
higher than the 2.5 pct target, it said.
The BoE also noted that considerable uncertainties surround these
forecasts.
Firstly, the possibility that the slowdown in the international
economy may be more prolonged remains a downside risk.
Secondly there is uncertainty about the speed and timing of any
moderation in consumption growth.
Finally, a sharp fall in the exchange rate may lead to upside risk
for prices.
Assuming that interest rates stay at 4 pct, the central projection
is for GDP growth to slip further in the first half of this year,
reflecting sluggish world activity and smaller corporate spending.
However, GDP growth then rises to around trend as renewed global
growth, a recovery in domestic investment and higher public spending
outweigh the impact of a moderation in consumer spending, it said.
"Growth over the two years is very similar to that in the November
Report," it added.
Despite this the MPC believes the overall risks to growth are
weighted to the downside.
Turning to consumer demand, the MPC expects past falls in equity
wealth and slowing real income growth will moderate consumer spending
over the course of 2002 and 2003.
However it added that "there is a possibility that high and rising
levels of consumer debt might cause a sharper slowdown."
The MPC expects investment to remain weak in the near term, but to
recover as growth picks up.
While the near-term outlook for world output is slightly weaker
than expected in the November Inflation Report, the prospect is still
for a steady recovery during the latter part of this year and beyond,
the bank said.
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