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High Inflation Will Threaten Hopes For New Bank Of England Governor

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Hopes that Mark Carney will be able to kick-start growth with a more active monetary policy are likely to be dashed by stubbornly high inflation, the latest report from the influential Ernst & Young Item Club said last night.

The new Bank of England governor will find his room for manoeuvre ‘very constrained’ with inflation overshooting its 2 per cent target, according to Peter Spencer, chief economic adviser to the Item Club, who added that QE is rapidly ‘reaching its sell-by date’.

‘We expect inflation to go up to 2.9 per cent this week, perilously near to 3 per cent,’ he said.

‘In the Budget the Chancellor suggested the Bank might move to a more explicit form of flexibility on the inflation target, but with inflation at this sort of level it is a very tricky situation and it is hard to see how that would work.’

He added the UK has reached ‘the point of diminishing returns’ with QE, the policy of printing money in the hope of stimulating the economy.

‘The first round of QE was very effective but any benefits from additional doses are likely to be offset by costs to pension funds and annuities,’ Spencer said.

A report in the Financial Times suggested UK companies will report an increase of more than £100bn in their combined pension scheme black holes over the past year.

Many funds have sought higher returns than those available on Government debt, which have been driven down by QE – but their rush into corporate bonds has driven down the returns on those too.

Spencer conceded, however, that Mark Carney’s arrival in Threadneedle Street in the summer could be a psychological boost.

‘A new face could be a bit of a tonic,’ he said.

In its Spring report, the Item Club said George Osborne’s measures to help homebuyers have reduced the risk of the UK slipping into a triple dip recession.

It predicts the economy will be boosted by the Chancellor’s Help to Buy scheme, aimed at enabling creditworthy borrowers who cannot raise large deposits to climb on or up the housing ladder. The Club forecasts one million households will move this year.

But the crisis in the eurozone will continue to overshadow the UK economy, which is expected to grow just 0.6 per cent this year.

‘The Government’s moves on housing are grounds to be less pessimistic than we otherwise would be, but the situation is still clearly very bleak,’ Spencer said.

‘The euro crisis has blown us off course. Even if they hold it together without any more Cyprus situations, they are still facing years of austerity.’

In a separate report for the British Chambers of Commerce, 64 per cent of firms said they believe David Cameron should renegotiate the UK’s relationship with the EU to stop firms being swamped by red tape.

Zero interest rates... Massive QE... Bailed out banking system and continual bailouts to infinity.

Don't really see Carney being able to bring anything to the table that hasn't already been done.

Not that it's going to make a spot of difference who's the 'guv.

Britain's banking system is broken. So are its people.

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High inflation is what they want, unfortunately they forgot they need high wage inflation as well. Without it your going to end up with a huge debt deflation problem. You can't inflate away debt with stagnating wages.

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  • 244 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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