King Inflation Stance Backed by CBI Amid Elusive Recovery

The Bank of England is right to look through accelerating inflation to help the economy, the country’s biggest business lobby group said, backing Governor Mervyn King’s view that tighter policy now would be a mistake.

As King prepares to publish the Bank of England’s latest economic outlook in its Inflation Report in London today, the Confederation of British Industry cut its 2013 growth projection to 1 percent from 1.4 percent and forecast that the central bank will keep policy unchanged until near the end of 2014.

The CBI endorsement follows a BOE statement last week that its current stance is “appropriate” as the recovery struggles to build momentum. Inflation has been above the central bank’s target for more than three years, and policy makers’ forecast for a further acceleration means King won’t see it return to the goal before he retires in less than five months.

“It’s not domestic inflation, it’s not inflation wholly under our control,” CBI Director-General John Cridland said in an interview. “The MPC have taken the right judgement to date to keep interest rates low. That’s the right prescription and one that I hope will continue” through 2013 and 2014, he said.

The pound fell 0.1 percent against the dollar today, and traded at $1.5647 as of 9:24 a.m. in London.

Data yesterday showed inflation held at 2.7 percent in January, while input prices surged the most in five months as crude oil costs rose. The BOE said on Feb. 7 that it is right to “look through” this period of above-target price growth as attempting to get it back to target sooner “would risk derailing the recovery.”

Bond Purchases

That same day, the Monetary Policy Committee kept its target for bond purchases at 375 billion pounds ($587 billion) and held its key interest rate at a record low 0.5 percent.

King will publish the new projections at a press conference at 10:30 a.m. in London and a majority of economists in a Bloomberg News survey said the MPC will raise both its 2013 and 2014 inflation forecasts. They also said it will leave its gross domestic product projections unchanged.

In November, the BOE said that inflation would slow to about 2.3 percent at the end of this year and 1.8 percent at end-2014, below its goal.

The Inflation Report press conference will be King’s penultimate one before he retires at the end of June. He will be succeeded by Bank of Canada Governor Mark Carney, who last week commended the BOE’s stance, saying the MPC has “quite appropriately” looked through a series of inflation shocks.

Pay Growth

With inflation showing little sign of cooling, that’s keeping a squeeze on consumers. A report today from VocaLink Ltd. showed take-home pay growth at Britain’s largest publicly traded companies was at 0.7 percent in the quarter through January, up from 0.4 percent in the previous three months. That’s less than the 2 percent growth recorded in the same period a year ago.

The CBI said in its report that the economy will expand 0.3 percent this quarter, avoiding a triple-dip recession after shrinking by the same amount in the last three months of 2012.

“I’m cautiously optimistic we’ll now see a bit of a pickup,” Cridland said. “The winter as a whole hasn’t been very spectacular, and I don’t think a pickup will feel spectacular, but it’s better than going in the wrong direction.”

While the global economy and financial conditions have improved as tensions related to the euro-area debt crisis eased, the risks to the U.K. growth outlook remain “on the downside,” Cridland said.

AAA Rating

The CBI director-general called on the government to boost infrastructure investment to promote a rebalancing of the economy, though he continued to support its policy for tackling the deficit. While the retention of the U.K.’s AAA credit rating is “very important” for business confidence, it would not “have enormous impact” if Britain lost it, Cridland said.

“Markets will take a judgment about the British economy based on whether they think the government is over time dealing with the structural deficit,” he said. “The evidence is, it’s taking us longer, it’s proving harder because of the headwinds, but we are dealing with the structural deficit and that’s what is really important.”

Before it's here, it's on the Bloomberg Terminal.