BOE Stimulus Dilemma Persists as Inflation Seen Higher: Economy

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A pedestrian passes a giant poster advertising "fresh" fruit outside a Tesco Plc supermarket in the borough of Kensington in London. “Weak growth and stagnation is the picture we’re likely to face for a while, and inflation remains above target,” said Rob Wood, an economist at Berenberg Bank in London. Close

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Photographer: Simon Dawson/Bloomberg

A pedestrian passes a giant poster advertising "fresh" fruit outside a Tesco Plc supermarket in the borough of Kensington in London. “Weak growth and stagnation is the picture we’re likely to face for a while, and inflation remains above target,” said Rob Wood, an economist at Berenberg Bank in London.

U.K. inflation forecasts for this year were raised by economists as they also scaled back growth predictions, highlighting the dilemma Bank of England officials face on whether to increase stimulus.

Consumer-price increases will average 2.8 percent this year, compared with 2.7 percent seen in March, according to the median forecast of 41 economists in the Bloomberg monthly survey published today. Economic growth will average 0.8 percent in 2013, compared with a previous forecast of 1 percent, the predictions show.

Monetary Policy Committee members are split on the need to increase bond buying to boost flagging growth, with Governor Mervyn King outvoted in both February and March in his push for more stimulus. Officials kept the target on hold this month, and minutes showing how they voted will be released on April 17.

“Weak growth and stagnation is the picture we’re likely to face for a while, and inflation remains above target,” said Rob Wood, an economist at Berenberg Bank in London and a former Bank of England official. “That’s the key thing that’s holding back further stimulus. Growth isn’t going to be bad enough to force any MPC members to change this month, so it’s August at the earliest.”

Photographer: Paul Thomas/Bloomberg

A customer enters a Cath Kidston Ltd. store advertising a sale in Manchester. The central bank predicts inflation will stay above its goal until early 2016. Close

A customer enters a Cath Kidston Ltd. store advertising a sale in Manchester. The... Read More

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Photographer: Paul Thomas/Bloomberg

A customer enters a Cath Kidston Ltd. store advertising a sale in Manchester. The central bank predicts inflation will stay above its goal until early 2016.

The survey results suggest the economy will avoid a triple- dip recession, a view shared by the National Institute of Economic and Social Research, which this week estimated that gross domestic product rose 0.1 percent in the first quarter, the same pace as in the three months through February.

GDP Growth

The Bloomberg survey also sees expansion of 0.1 percent in the first quarter, less than the 0.2 percent forecast last month. Economists predict growth will then accelerated every three months to reach a pace of 0.4 percent in the fourth quarter.

Inflation probably averaged 2.8 percent in the first three months and will accelerate to 3 percent in the next two quarters before slowing to 2.8 percent in the final three months of the year, the survey shows.

The pound rose for a third day against the dollar, reaching $1.5378, the highest since Feb. 20. It was trading at $1.5375 as of 10:38 a.m. London time, up 0.3 percent from yesterday. Government bonds were little changed, with the 10-year gilt yield at 1.79 percent.

BOE Remit

Chancellor of the Exchequer George Osborne announced in his March 20 Budget that he will give King and the MPC more leeway to meet their 2 percent inflation target amid strains in the economy. He also asked the BOE to assess the benefits of forward guidance for policy. King will be replaced by current Bank of Canada Governor Mark Carney on July 1.

“I threw the towel in a month ago -- there’s no reason to expect growth to improve,” said Alan Clarke, an economist at Scotiabank in London. “For now, we don’t have any more quantitative easing. They’ll probably wait until Carney.”

The central bank predicts inflation will stay above its goal until early 2016. It accelerated to 2.8 percent in February, and data due on April 16 will show how it fared in March.

While King and his colleagues Paul Fisher and David Miles voted to increase bond purchases by 25 billion pounds ($38 billion) in March, the remaining six voted for no change. Minutes of that meeting showed the MPC majority noting that with price growth above their 2 percent goal, there was a risk that adding to stimulus “could lead to inflation expectations drifting upwards.”

Miles’s View

Miles said on Sky News television yesterday that more stimulus is the “right strategy” because growth has been “extremely low, and the outlook is not for a rapid pickup.” He also said he expects inflation to slow toward the BOE’s goal.

In the euro area, economists predict that inflation will average 1.7 percent in 2013, compared with a previous forecast of 1.8 percent, according to the median of 52 forecasts in the Bloomberg survey. It shows the economy contracting 0.4 percent this year, twice as much as previously predicted.

In Germany, the Federal Statistics Office said today that inflation was at 1.8 percent in March, unchanged from February and in line with a preliminary estimate. The European Central Bank said in its monthly bulletin, also released today, that it will look for signs in economic data that inflation could slow more than it currently anticipates.

Monitoring Data

“In the coming weeks, the Governing Council will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability,” it said, echoing President Mario Draghi’s April 4 policy statement. “The monetary policy stance will remain accommodative for as long as needed.”

Data in Greece showed the unemployment rate rose to 27.2 percent in January from a revised 25.7 percent the previous month. In Australia, unemployment climbed in March to the highest level in more than three years. The jobless rate there rose to 5.6 percent from 5.4 percent, the statistics bureau said in Sydney today.

Later in the U.S., a report will probably show initial jobless claims fell to 360,000 in the week ended April 6 from 385,000 in the previous period, according to a Bloomberg survey.

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Joshua Robinson in London at jrobinson37@bloomberg.net

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

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