Inflation to stay above target, says Bank of England

Sir Mervyn King: "Inflation is likely to rise in the near term"

The UK inflation rate will remain stubbornly high for longer than previously thought, the governor of the Bank of England has said.

Sir Mervyn King now expects inflation, currently 2.7%, to rise to at least 3% by the summer and to remain above the Bank's 2% target for two years.

In November he had said that inflation would fall back towards its target in the second half of this year.

But the governor also said that "a recovery is in sight".

Sir Mervyn King, presenting the Bank's latest Quarterly Inflation Report, 20 years after it issued its first one, said the economy had "cause for optimism".

'Own goal'

Sir Mervyn said that factors outside of the Bank's control - increases in university tuition fees and utility bills - had added to inflation recently.

Start Quote

Inflation is going to stay further above target, for longer. And the Bank of England is not planning to do much about it. Growth in the real economy is also going to continue to disappoint. And our central bank doesn't expect to make a big difference to that either”

End Quote

"If you like, it is a bit of a self-inflicted goal in terms of the damage done to real take-home pay, perhaps another way of trying to implement fiscal consolidation through moving up the price level," he said.

"This is not the result of easy monetary policy and nor does it reflect what's going on in the economy."

He drew parallels between now and when the Bank's first inflation report was presented in 1993.

"[In February 1993] unemployment had just reached its peak. Although we didn't know it at the time a recovery was on its way.

"[Today] there is cause for optimism. Today too a recovery is in sight."

'Encouraging' picture

The economy shrank by 0.3% in the last three months of 2012, fuelling fears that the UK could re-enter recession, defined as two consecutive quarters of contraction.

Start Quote

The Bank remains between a rock and a hard place in trying to strike a balance between the rising pressures of inflation and supporting the economic recovery”

End Quote Joshua Raymond City Index

Although economic output has been broadly flat for the past two years, Sir Mervyn said that masked "a more encouraging underlying picture".

Manufacturing and services - which make up the bulk of the economy - had grown during 2012, seeing a similar performance to that in the US and considerably stronger than in Japan and the eurozone, he said.

The weakness in overall output reflected falls in construction, which is "unlikely to be repeated in 2013".

"This hasn't been a normal recession and it won't be a normal recovery," he said.

"Growth is likely to be weak in the near term but further out a continued easing in domestic credit conditions, supported by the Bank's asset purchase programme and the Funding for Lending Scheme, together with the stronger global backdrop, underpin a slow but steady recovery in output," the governor said.

Attempting to bring inflation back to target sooner would risk "derailing the recovery", he added.

Joshua Raymond, chief market strategist at City Index, said the report showed "a continuing divorce of priorities at the Bank of England from inflation targeting to supporting the economic recovery".

"The Bank remains between a rock and a hard place in trying to strike a balance between the rising pressures of inflation and supporting the economic recovery," he said.

"Clearly right now the Bank is firmly weighting its actions to the latter at the expense of inflation but the question is how long can this last?"

Living standards

Sir Mervyn was delivering his penultimate Inflation Report. His last Report will be in May, before he is replaced by Mark Carney as governor in the summer.

Pound Sterling v US Dollar

Last Updated at 29 Jul 2014, 04:00 ET *Chart shows local time GBP:USD intraday chart
£1 buys change %
1.6982
0.00
-0.01

The governor's message that the central bank was resigned to above-target inflation sent the pound falling on the currency markets.

It fell 1% against the euro to 1.1521 euros and was 0.6% lower against the dollar at $1.5573.

The prospects for inflation will be a blow for many facing pay freezes or below-inflation wage rises.

The Office for National Statistics said on Wednesday that UK workers were earning no more than they were 10 years ago, while a report from the Resolution Foundation think tank warned that it could be another 10 years before living standards return to the levels they were at before the recession.

In Prime Minister's Questions, Labour leader Ed Miliband asked David Cameron if living standards would be higher in 2015 than they were in 2010.

The prime minister said that people on the minimum wage would be better off due to cuts in income tax bills, and pointed out that inflation is lower now than it was in 2010.

"People will be a lot better off than they were under Labour, with a record deficit, with unreformed welfare, with a busted banking system," Mr Cameron said.

"They will have seen a government that's got the deficit down, that's cut their income taxes, that's dealt with the banks."

Labour's shadow chancellor took a different view: "Our flatlining economy means wages and living standards are being squeezed and ministers are piling on top of that cuts to tax credits and child benefit while giving millionaires an average £100,000 tax cut in April," said Ed Balls.

He accused the prime minister and chancellor of being "totally out of touch with millions of working people".

More on This Story

Related Stories

The BBC is not responsible for the content of external Internet sites

More Business stories

RSS

BBC Business Live

  1.  
    BANKERS ETHICS 08.58:
    Book

    Back to the proposed bankers' oath. Would it mean an end to such fines as the £218m Lloyds received yesterday for fiddling rates? Think tank ResPublic, which operates "on the premise that human relationships should once more be positioned as the centre and meaning of an associative society", hopes so. Click here to read what it suggests are the magic words.

     
  2.  
    RUSSIAN SANCTIONS 08:45: BBC Radio 4
    Russian President Vladimir Putin

    Former foreign secretary Sir Malcolm Rifkind is talking to the Today programme about the potential impact of sanctions on Russia. He says President Putin is unconcerned about his popularity at home. "This isn't about his popularity this is about imposing sanctions that will require Putin to change his policy," he says. Up to now, he says, sanctions have been "pretty useless". Sanctions need to be about serious economic damage to Russia, he adds.

     
  3.  
    UBS PROBE 08:35:
    The floor of the New York Stock Exchange on 28 March, 2014.

    The "Dark Pools" investigation widens to include UBS. The Swiss bank became the latest bank to say it is cooperating with inquiries about these alternative trading systems. Its second quarter report this morning said a clutch of US regulators, including the Securities and Exchange Commission, the New York Attorney General, and the Financial Industry Regulatory Authority had made inquiries. Banks Barclays and Credit Suisse are also involved in probes.

     
  4.  
    RUSSIAN SANCTIONS 08:25:

    Separately the US State Department has accused Russia of violating a key arms control treaty by testing a nuclear cruise missile. Russia tested a ground-launched cruise missile, breaking the Intermediate-Range Nuclear Forces Treaty signed in 1987 during the Cold War, the US says. A senior US official described it as "very serious" but gave little more in the way of detail.

     
  5.  
    PAY KICK? 08:13:

    Two fund managers overheard on the 06:45 to Vauxhall: "It's called a pay away, not a kick back." Business Live (not being perfect) does not know what this means. Any ideas?

     
  6.  
    HEADLINES
  7.  
    RUSSIAN SANCTIONS 08:05: BBC Radio 4

    One more from Malcolm Bracken on Today. He doesn't mince his words. He says: "Putin has looted an enormous amount of money from the Russian people." Mr Bracken adds he doesn't think the aim of sanctions will be to "devastate the Russia economy or isolate it from the world." But squeezing "the cronies" will be language Mr Putin can understand, he says.

     
  8.  
    NEXT PROFITS 07:53:
    Woman in picture

    Next also has results. First half profits at the clothing and homeware retailer rose 10.7%. Next tells investors to stand by for better profits of between £775m and £815m. Sales at the physical stores were up 7.5% and through the Next Directory were 16.2% higher.

     
  9.  
    BP PROFITS 07:43:

    BP says rising oil and gas production from new or recently started projects led to increased processing of heavy crude oil by the newly-modernised Whiting refinery contributed to operating cash flow of $7.9bn in the quarter. Total operating cash flow for the first half of 2014 was $16.1bn.

     
  10.  
    RUSSIAN SANCTIONS 07:36: BBC Radio 4

    The purpose of sanctions is to target the regime and [Russian president] Putin's cronies, not really the Russian people, Malcolm Bracken, analyst at Redmayne Bentley, tells the Today programme. "The mismatch," he says "Is that Russia needs German money from gas sales even more than Germany needs Russia gas." Germany can get its gas from countries other than Russia, he adds. But Putin can impose far greater economic pain on his people than Angela Merkel can on hers.

     
  11.  
    MORRISON'S CHAIRMAN 07:30:
    Signage for Morrisons supermarket on a trolley handle

    There's confirmation that former Tesco finance director Andrew Higginson will become the the new chairman of rival supermarket Morrison's when Sir Ian Gibson retires in 2015. Mr Higginson will join the board on 1 October as non-executive deputy chairman. He was finance director at Tesco between 1997 and 2012. He is currently chairman of Poundland, N Brown Group and McCurrach UK as well as a non-executive director at BSkyB.

     
  12.  
    BP PROFITS 07:17:
    British Petroleum sign

    BP has reported profits (second-quarter replacement cost profit - which strips out the effect of oil price movements) of $3.2bn, compared with $2.4bn a year earlier.

     
  13.  
    BIG CHEESE 07:13: BBC Breakfast
    Cheese

    The biggest event in the global cheese calendar starts today in Nantwich in Cheshire. Steph McGovern is at the International Cheese Fair for Breakfast along with the 4,500 cheeses there. Andrew Loftus, agriculture manager for Morrison's supermarkets says: "Customers need a big variety, the block cheese, the cheddars, but we also have our own range that we cut and grate in our factories."

     
  14.  
    BANKING ETHICS 07:03: Radio 5 live

    Control Risks' Charles Hecker on Wake Up to Money pulls together the two big topics of the morning - Russia and banking ethics. He says it's the ethics that attract them: "There is a reason why the British banking sector is by a mile the preferred destination for Russian financial transactions. It's seen as transparent and liquid market that is well regulated and is seen as clean." And they also like the flight time and the restaurants, he says.

     
  15.  
    UBS RESULTS 06:53:
    The logo of Swiss bank UBS

    Swiss bank UBS reports second quarter net profit of 792m Swiss francs (£516m), up from 690m francs last time. Results were whacked last year by a $885m settlement with the US housing regulator over the mis-selling of mortgage-backed bonds. The bank has still had to set aside 254m euros (£165.4m) this year, mainly to settle legal claims that it helped wealthy Germans to dodge taxes.

     
  16.  
    RUSSIAN SANCTIONS 06:41: BBC Radio 4

    In case you were wondering why sanctions were back on the news menu, last week, European leaders agreed there should be tougher sanctions on Russia after Ukrainian separatists brought down Malaysia Airlines MH17. This week they decide what sanctions should be applied and against whom or what.

     
  17.  
    BANKING ETHICS 06:31: Radio 5 live
    Triumph of Virtue and Nobility

    Would getting bankers to swear an oath promising good behaviour work? That's a suggestion by one think tank, ResPublica. It wants to introduce "Virtuous Banking". But the chairman of the Banking Standards Review Council, Sir Richard Lambert, tells Wake Up to Money an oath won't help to bring that about.

     
  18.  
    GAS GUZZLER 06:21:
    Mayor of London Boris Johnson

    London mayor Boris Johnson wants the drivers of diesel cars to pay an extra £10 - on top of the congestion charge it should be noted - for the pleasure of driving into the centre of the capital according to a report in the Daily Mail today. Other cities are also considering introducing low-emission zones to crack down on diesel fumes. These cars were once encouraged as being less polluting...

     
  19.  
    RUSSIAN SANCTIONS 06:08: Radio 5 live

    More from Charles Hecker. He tells Wake Up to Money: "I don't think anybody is that keen on sanctions that are going to impact on their own economic sectors." Part of the problem with European sanctions against Russia is the French have defence deals with Russia, there is a substantial amount of Russia money in the UK's financial services sector and Germany has energy deals with Russia, he adds

     
  20.  
    RUSSIAN SANCTIONS 06:01: Radio 5 live

    Charles Hecker of consultancy Control Risks tells Wake Up to Money targeted sanctions, whether against sectors of the Russian economy or against individuals, would have a potential impact and suggests the Russian economy is already teetering on the edge of recession. But he adds both Cuba and Iran have been subject to far more stringent sanctions and that further sanctions against Russia are unlikely to change the country's behaviour.

     
  21.  
    06:00: Rebecca Marston Business reporter, BBC News

    Yes, we're back. And we're here: bizlive@bbc.co.uk @bbcbusiness - should you wish to get in touch.

     
  22.  
    06.00: Matthew West Business Reporter

    Morning everyone. Yesterday afternoon we had a £218m fine for Lloyds for its part in the 2012 Libor scandal, while the think-tank ResPublica has suggested this morning bankers should take an oath - a bit like doctors - to fulfil their "proper moral and economic purpose". We also have second quarter trading updates from BP and Next this morning, plus more on Russian sanctions.

     

Features

From BBC Capital

Programmes

  • The smartphones of shoppers being tracked in a storeClick Watch

    How free wi-fi can enable businesses to track our movements and learn more about us

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.