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BoE Raises Inflation Forecast More Than Expected

The Bank of England raised its inflation forecast for two years time to around 1.8 percent on Wednesday, higher than most economists had expected, raising doubts about further quantitative easing.

London Financial District
Photo: Vulture Labs | Getty Images
London Financial District

The BoE's quarterly Inflation Report predicted sluggish growth in the short term, and said that the euro zone crisis posed the biggest threat to Britain's economic recovery.

Last week the BoE's Monetary Policy Committee voted for another 50 billion pounds of quantitative easingover the next three months, taking the total to 325 billion pounds.

Before Wednesday's report, a small majority of economists had expected a further extention of QE in May, and on average had seen an inflation forecast of around 1.6 percent, up from 1.3 percent in November's report.

The latest projections are therefore likely to dampen expectations for further stimulus — although economists will now pay particularly close attention to BoE Governor Mervyn King's presentation of the figures at 1030 GMT.

Inflationhit a three-year high of 5.2 percent in September, but by last month it had eased to 3.6 percent after a hike in value added tax at the start of 2011 fell out of the annual comparison, and food and energy prices fell.

"Inflation is likely to fall further," the report said. "But the extent to which inflation will decline and the likely pace of that moderation remain uncertain."

Oil prices and the uncertain impact of high unemploymenton wages and firms' profit margins were key factors making it hard to predict how fast inflation will fall, the BoE said.

"There remains a range of views among Committee members regarding the relative strength of the factors affecting the outlook for inflation."

Some MPC members, such as chief economist Spencer Dale, have been concerned that past BoE forecasts were over-optimistic about how fast inflation would fall, worrying about a loss of productivity in the economy.

The central prediction in the inflation report was for there to be a roughly 45 percent change that inflation will be above target by Q1 2014 — the key horizon for policymakers — up from a roughly one-in-three chance predicted in November.

After an improvement in business surveys and market confidence at the start of this year, most analysts reckon Britain will just about avoid entering another recession , and that growth will slowly pick up through the year.

However, the BoE trimmed its medium-term growth forecasts slightly, seeing around 3.0 percent annual growth by Q1 2014 compared to 3.2 percent in November's report.

"GDP growth in the UK is likely to remain weak in the near term, before gradually strengthening as households' real incomes recover, supported by continued stimulus from monetary policy. But the drag on domestic spending from tight credit conditions and the fiscal consolidation is likely to persist."

Data earlier on Wednesday showed the total number of people claiming unemployment benefit in January rose to its highest in two years.