King Faces Dilemma as U.K. Inflation Forecasts Rise: Economy

Bank of England Governor Mervyn King faces a dilemma on whether to increase stimulus again next month to boost a flagging economy after economists raised their forecasts for inflation.

The inflation rate will average 2.1 percent in 2013, above the central bank’s 2 percent target, according to the median forecast in a monthly Bloomberg News survey of economists. That’s up from a 2 percent rate projected in September.

The Bank of England’s current round of quantitative easing finishes next month and officials face a decision at their Nov. 7-8 meeting on whether to add to it. Policy maker Martin Weale said in an interview published today he’s concerned whether more QE is the right measure with inflation above target. His comments follow similar remarks from colleagues Ben Broadbent and Chief Economist Spencer Dale about inflation risks.

“I’m on the verge of throwing the towel in about forecasting more QE and saying no more,” said Alan Clarke, an economist at Scotiabank Europe Plc in London. “If you want to justify stimulus on the basis of the inflation outlook, there isn’t one. More would mean they’re turning a blind eye to inflation and focusing on growth.”

The Bank of England will publish new forecasts for growth and inflation next month that will inform the Monetary Policy Committee’s November decision. In August, it forecast that the inflation rate would fall below its target in the fourth quarter of 2013, to about 1.9 percent.

The Bloomberg survey shows inflation averaging 2.3 percent in the second quarter of 2013 and 2.2 percent in the third quarter. It will slow to 2 percent in the fourth quarter before accelerating to 2.1 percent in the next three months. In 2014, inflation will average 2.1 percent, according to the survey.

Weale’s Concerns

“It is certainly not self-evident to me in the light of the apparent stickiness of inflation that substantial extra support for the economy would be compatible with the inflation target,” Weale said in an interview with the Daily Mail newspaper. “I am concerned about the stickiness of inflation.”

The comments signal he is reluctant to back more QE. They follow remarks by Broadbent last month that officials’ capacity to add to stimulus is limited by faster-than-expected inflation. U.K. consumer-price growth cooled to 2.5 percent in August from 2.6 percent, data last month showed. It’s been above the Bank of England’s 2 percent target every month since December 2009.

“The persistent worry we have is that if people get used to the idea of high inflation, if they take the view that the Bank of England isn’t bothered about the inflation target, it can lead to increased inflation risks and can affect the way in which people negotiate wages and set prices,” Weale said.

Skepticism

The Bank of England last expanded QE in July, when it increased its bond-purchase target by 50 billion pounds to 375 billion pounds. Barclays Plc forecasts that it will increase the target by a further 50 billion pounds next month, though the nine-member MPC is likely to split on the decision.

“Weale has previously voiced skepticism over additional QE at the current juncture,” Barclays economists including Chris Crowe in London said in an e-mailed note today. “In light of these comments, we think it unlikely that he will support additional easing.”

Weale said that while the economy probably rebounded in the third quarter after one-time factors in the three months through June, underlying growth is “flat.” He also said the central bank must ensure the credibility of its monetary policy.

“You get much greater stability with inflation targeting and for the regime to be credible, people have to think it is taken seriously,” Weale said in the interview.

‘Aim Off’

Speaking earlier this week, Governor Mervyn King also highlighted the importance of inflation targeting and said the Bank of England had built up credibility over the past two decades. Still, he also said there are circumstances where it may be “justified to aim off” the target for a while.

He has previously said the central bank’s decision not to try to bring down inflation too fast after it accelerated above 5 percent in 2011 was because such action could have caused a deeper recession.

“There may be other reasons in the future for accepting an overshoot or indeed an undershoot” for a period, King said in London on Oct. 9.

Elsewhere today, South Korea cut interest rates hours after Brazil as economies around the world shield themselves from the risk of a deeper slowdown driven by weakness in China and austerity measures in Europe.

The Bank of Korea lowered the benchmark seven-day repurchase rate to 2.75 percent from 3 percent. Brazil’s central bank cut the Selic rate fell by the same amount to a record low 7.25 percent. Indonesia left its benchmark unchanged.

The U.S. trade deficit probably widened to $44 billion in August from $42 billion in July, according to a Bloomberg survey before a report later today. Initial jobless claims probably climbed 3,000 to 370,000 in the week ended Oct. 6, another Bloomberg survey of economists showed. The Bloomberg Consumer Comfort Index is also due today.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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