Bank of England sees inflation staying higher for longer

Wed Feb 13, 2013 7:58am EST
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By David Milliken and Olesya Dmitracova

LONDON (Reuters) - Britain's central bank said on Wednesday that inflation would stay higher for longer and its governor cautioned that further bond-buying to boost the weak recovery might have limited impact.

The economy was set for a "slow but sustained recovery" over the next three years, and economic output was unlikely to surpass its pre-financial crisis peak until 2015, the Bank of England said in its quarterly inflation report.

"The UK economy is ... set for a recovery. That is not to say that the road ahead will be smooth," the bank's governor, Mervyn King, told reporters. "This hasn't been a normal recession, and it won't be a normal recovery."

The bank forecast that inflation in two years' time was likely to be around 2.3 percent, up sharply from the 1.8 percent forecast in November.

It also extended the time frame for inflation returning to target to early 2016, 18 months later than what it predicted in November. The bank's forecasts also suggest inflation will peak at about 3.2 percent in the third quarter of 2013.

In a news conference following the release of the report, King - who is due to retire in June - said the bank would not risk undermining the slow recovery of the British economy by turning the screws on policy to bring inflation back into line.

"Attempting to bring inflation back to target sooner would risk derailing the recovery and undershooting the target in the medium term," he said.

The Bank of England has spent 375 billion pounds ($587 billion) on buying government bonds but more recently has held off from increasing the program.   Continued...

Customers shop for groceries in a supermarket in London October 18, 2011. REUTERS/Neil Hall