Bank chief raises recovery hopes
Published 15/05/2013 | 11:11
The Bank of England has raised hopes over the economy by predicting a "modest and sustained" recovery but warned that inflation will remain stubbornly high until at least the end of 2015.
The Bank said growth should pick up to 0.5% in the second quarter of this year but it warned that the hangover from the financial crisis would ensure the recovery is weak and uneven.
Presenting his last quarterly inflation report, outgoing Bank governor Sir Mervyn King said growth will be "a little stronger" than previously hoped - "the first time I have been able to say that since before the financial crisis".
Sir Mervyn's tone was markedly more upbeat than three months ago and follows surprise growth of 0.3% in the first quarter of 2013.
The governor, who hands over to Mark Carney in July, said: "This hasn't been a typical recession and it won't be a typical recovery. Nevertheless a recovery is in sight."
The Bank said economic stimulus, including its credit-boosting Funding for Lending scheme (FLS) and £375 billion of quantitative easing (QE), will support the recovery and get households and businesses spending again, although it added that the main risks continue to come from abroad.
Rising energy and food bills and higher tuition fees will continue to heap pressure on cash-strapped consumers but Sir Mervyn said inflation will be "a little weaker" than it previously expected in February.
However it sees inflation peaking at 3.2% after the summer and it is unlikely to fall below its 2% target until the first quarter of 2016.
Sir Mervyn said the Bank is performing a difficult balancing act on inflation. He added: "We would like inflation to come down much faster. We are certainly not happy with the present situation but it does not follow from that that the best thing to do is to raise interest rates and push the economy into recession." He said attempting to slash inflation too quickly would mean even slower growth and higher unemployment.
Chancellor George Osborne gave the Bank a looser remit on inflation in his March Budget, allowing it to tolerate higher periods of above-target inflation in its pursuit of growth. Headline consumer price index inflation remained stuck at 2.8% in March. Britain has been dogged by persistently high inflation and weak growth since 2008, prompting the Bank to pump money into the economy and slash interest rates to their current 0.5% record low. Markets currently expect the base rate to remain below 1% for the next four years.