Central Banks

UK inflation overshoot now expected to be sooner and lower

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The Bank of England (BOE) said Thursday that U.K. inflation should now overshoot its 2 percent target as early as late 2017 and would also be lower than previously expected.

The central bank forecast in November that consumer price inflation (CPI) should rise above the 2 percent target from 2018 and on Thursday it said CPI would reach 2.75 percent some time that year. However, due to a rise in the value of sterling over recent weeks, the BOE said Thursday that it was confident that CPI would be above the 2 percent target next year.

"Looking forward, the MPC (monetary policy committee) expects inflation to rise to the 2 percent target within six months," the bank's committee said in a statement as it kept its interest rates unchanged on Thursday.

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"Since the committee's previous meeting, sterling's trade-weighted exchange rate has appreciated by over 6 percent, while dollar oil prices have risen by 14 percent. All else equal, this would result in a slightly lower path for inflation than envisaged in the November inflation report, though it is still likely to overshoot the target later in 2017 and through 2018," the committee added.

Inflation in the U.K. rose to 1.2 percent in November from 0.9 percent in October. The new forecasts come as the Bank of England unanimously decided Thursday to keep its benchmark interest rate at 0.25 percent and to keep its current quantitative easing (QE) program unchanged.

The institution led by Mark Carney believes that the U.K. economy has continued growing at a moderate pace and there was no need to update its monetary stance.

"The U.K. economy requires no further support from monetary policy. The economy has outperformed expectations since the referendum. And while growth is set to slow next year the risk of recession looks low," Kallum Pickering, senior U.K. economist at Berenberg, said in a research note.

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