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BoE: Expect two more years of above-target inflation

Jenny Cosgrave
Written By:
Jenny Cosgrave
Posted:
Updated:
07/02/2013

Investors should prepare for inflation to remain above the 2% target for the next two years, the Bank of England has warned.

In a rare statement accompanying today’s monetary policy decision, the Monetary Policy Committee (MPC) said inflation is expected to fall back to its target level after that point.

The forecast represents a further extension of the committee’s time horizons; Bank of England governor Mervyn King said in December he did not expect inflation to fall back below 2% until Q3 2014.

“CPI inflation is likely to rise further in the near term and may remain above the 2% target for the next two years, in part reflecting a persistent inflationary impact both from administered and regulated prices and the recent decline in sterling,” the MPC said.

CPI inflation has fallen back from its 2011 high of over 5%, but remained well above target at 2.7% as of this January.

“Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term,” the committee said.

Today’s decision saw the committee maintain the bank rate at 0.5% and the asset purchase programme at £375bn.

The Bank added it would also reinvest the cashflows of the £6.6bn gilt maturing in April 2013, a move equivalent to a mini-stimulus.

Incoming Bank of England governor Mark Carney suggested in December that it could be beneficial for central banks to target nominal GDP (a mixture of GDP and inflation rates) rather than simply focus on the headline inflation level.