Bank Sees Inflation On Target In Two Years

[karhu]

Bank sees inflation on target in two years

10/05/2006 09:36

LONDON (Reuters) - Inflation will hit its 2.0 percent target in two years assuming interest rates rise very gradually as implied by the market yield curve, the Bank of England forecast on Wednesday.

The central bank’s quarterly Inflation Report showed CPI inflation rising in the near-term on the back of higher energy and import costs before falling back to around the 2.0 percent target in two years.

Some Monetary Policy Committee members, however, thought that inflation would be little higher but others thought it would be lower. They agreed the risks were broadly balanced.

That forecast was a little higher in the near-term compared with February’s report but similar thereafter.

The BoE said that CPI inflation would also be a little higher if interest rates remained steady at 4.5 percent throughout the forecast period.

It calculated the market yield curve implied that interest rates would rise gradually to 4.6 percent by the end of the year and to 4.7 percent in the second quarter of 2007.

Many economists and traders in recent days had assumed that interest rates would rise at a sharper pace sooner, perhaps even as early as September.

The BoE report may boost expectations that interest rates are not about to change soon but that the next move will indeed be up. Many economists had been holding out for another cut this year.

On GDP, the central bank said that growth was likely to stay close to its long-run average over the next three years, underpinned by steady expansion in consumer spending.

The risks to this forecast were broadly balanced but the profile was described as slightly weaker than in February.

The MPC noted a pick-up in inflation expectation, perhaps higher related to higher utility bills, but said there was little evidence that this was sparking higher earnings growth.

The BoE’s Monetary Policy Committee held interest rates at 4.5 percent for the 9th month running last week.

Only 8 members were present at last week’s policy meeting as the Treasury has yet to appoint a replacement for Richard Lambert who stepped down suddenly in March.

http://www.tiscali.co.uk/news/newswire.php...y_template.html

This needs to be debated.

[dog]

Inflation will hit its 2.0 percent target in two years assuming interest rates rise very gradually

Edited May 10, 2006 by dog

[Jason]

Full report here:

http://www.bankofengland.co.uk/publication...rt/irlatest.htm

Edit:

Diret link to full document: http://www.bankofengland.co.uk/publication...ort/ir06may.pdf

Edited May 10, 2006 by Jason

[Surrey cash buyer]

Bloomberg

The forecasts are modeled on the Bank of England benchmark rate following the path implied by market interest rates. Investors are betting the Bank of England will raise the repurchase rate a quarter-point to 4.75 percent this year and to 5 percent by the middle of 2007.

[karhu]

The markets seem to be looking at the first hike in July or August.

This report is move dovish than I expected.

Our next indicator is the MPC minutes.

Edited May 10, 2006 by karhu

[Realistbear]

Its the sort of attitude that was present in the UK in the summer of 1939. Everything will be fine IF.

Its the "ifs" that are the problem. IR are heading upwards worldwide and the Asian banks call the shots not the BoE. The UK is a debtor nation like the US and cannot dictate what IR will be as if we are in some kind of miracle economy cocoon protected from world realities that include inflationary elements not least among which is oil and other essential fuels. We are losing jobs and our balance of payments is deteriorating. At some point the currency markets are going to wake up to this fact and the pound will suffer forcing IR up in any event.

This economy simply cannot rely on consumer spending and HPI to keep things moving. The article refers to stagnant wage growth along with more consumer spending. There is a breakdown in the logic here. Especially in a world where the cost of living, in real terms, is rising rapidly.

My message to the BoE professors is to wake up and look at reality and accept that the economic cycle is not in the same place when Gordon came to power.

[munimula]

http://www.tiscali.co.uk/news/newswire.php...y_template.html

This needs to be debated.

What was I telling you a few weeks ago Karhu!!

Exactly this, that whilst GB has his eyes set on getting into No. 10 the BoE 2-year projections will predictably stay at or below 2% to allow them to get away with small or no interest rate rises.

It's been like this for years now.

Aided by fudging the inflation measurements.

Good to see that they mention gradually increasing IRs though - that'll put an end to this ridiculous show.

[karhu]

What was I telling you a few weeks ago Karhu!!

Exactly this, that whilst GB has his eyes set on getting into No. 10 the BoE 2-year projections will predictably stay at or below 2% to allow them to get away with small or no interest rate rises.

It's been like this for years now.

Aided by fudging the inflation measurements.

Good to see that they mention gradually increasing IRs though - that'll put an end to this ridiculous show.

Hahhaaha. Glad to see our ideas are converging. However, the money markets don't look very happy about this report. They were expecting a more hawkish tone. Have a look at Sterling today.

[Guest Charlie The Tramp]

BBC News 24 discussed the implications and were positive a rise in IRs was on the way. Not very good news for credit card holders and mortgages they said.

[munimula]

Hahhaaha. Glad to see our ideas are converging. However, the money markets don't look very happy about this report. They were expecting a more hawkish tone. Have a look at Sterling today.

The BoE and GB know that interest rate rises will break this economy. That's why they are determined not to increase them. The falling dollar is also helping the UK.

As long as the BoE keep their 2-year projections of inflation below 2% then they don't have to change them.

Remember last year inflation hit 2.4% but the 2 year projections were always below 2%.

The problem is that predicting future inflation rates is not an exact science. It's hard enough predicting short term inflation rates. Personally I think they are wrong, I think the huge increase in input prices that companies have been experiencing will have to be passed on at some point, I think the latest output price inflation of approx 2.4% is an indication of this. This should push inflation up and personally I think it will go higher but then I'm not in control of the CPI measurment and whilst they continue to use hedonics and include things like MP3 players and widescreen TVs in the measurement they have the upper hand.

I think that as it suits the BoEs desire to keep interest rates down the 2-year projection will always conveniently be less than 2%.

What will force their hand is if the short term inflation rates take off. If and when they do they will be taken off guard and may have to quickly review their forecasts and possibly react quickly with steep interest rate rises.

The only way that this is going to happen though is if companies start passing on their costs and prices go up.

But you have to ask - how do they manage to keep the increase in costs out of inflation figures? There have to be dubious forces at work here. In a global oil economy where everything is priced in oil and oil has gone from $10 (1998) to $70 (2006) HOW THE HELL IS INFLATION BELOW 2%?????

Edited May 10, 2006 by munimula

[bubbleturbo]

http://www.telegraph.co.uk/money/main.jhtm.../ixcitytop.html

Just what we need to sh1t up the sheepie

http://breakingnews.iol.ie/news/story.asp?...714&p=y8zy974zx

[peloton]

On housing, King noted that house prices have recently increased by more than the MPC anticipated.

However, he warned that that may not carry on, with house prices still 'remarkably' high compared with average earnings and the recent slowdown in loan approvals.

[Realistbear]

Mervyn is a realist:

http://www.iii.co.uk/news/?type=afxnews&ar...&action=article

2006-05-10 11:21 GMT

Updating to add King comments on interest rates, housing)

LONDON (AFX) - Bank of England governor Mervyn King stressed the

upside risks to inflation

from the recent rise in energy and commodity costs and reiterated that the central bank's rate-setting body stands ready to do whatever it takes to keep CPI inflation at the 2 pct target set by the government.

In remarks following the publication of the quarterly Inflation Report, King said the Monetary Policy Committee

"remains ready to take

whatever action is necessary

in order to keep inflation on track to meet the target in the medium term".

Though King said the risks to the outlook for inflation are balanced, he spent much of introductory remarks talking about the

spike up in energy costs

. In its central projection, the BoE said it expects CPI inflation to rise above target in the near-term as a result of a spike in domestic gas and electricity prices.

"Following a decade in which import prices have, on average, fallen, they have recently picked up and are expected to add to rather than subtract from inflation over the forecast period," said King.

He added that the rise in the prices of oil and other commodities, such as metals, have risen since the February Inflation Report, manifesting themselves in higher inflation expectations among the public.

"It is difficult to know precisely how these changes will be passed through to consumer prices and they pose upside risks to inflation," he said.

"There are also downside risks stemming from uncertainty about the speed and extent of any fall in inflation as energy prices stabilise," he added.

King voiced some concern over the recent rise in inflation expectations.

Although the change has been "small so far", if expectations continue to rise the MPC "will be concerned", he said.

King also sought to temper any expectations that today's Inflation Report necessarily means that interest rates are likely to rise over the coming two years.

With the key repo rate unchanged at 4.50 pct, the BoE sees CPI inflation

well above the 2 pct target

over the two-year forecast horizon.

The BoE's main forecasts are based on market expectations over the likely path of interest rates.

Since February's Inflation Report, the market is now anticipating a rise in the benchmark repo rate from the current 4.50 pct following a raft of solid economic news. By the second quarter of 2008, the market expects official rates to be around 4.9 pct, against little change in February's set of projections.

"It would be a big mistake to make precise links between these forecasts and what will happen to interest rates," said King.

He noted that since the projections in today's Inflation Report were drawn up, the pound has surged, providing a deflationary impact to counteract the commodity price surge.

"There will be many more changes between now and the next meeting," he added.

On housing, King noted that house prices have recently increased by more than the MPC anticipated

.

However, he warned that that may not carry on, with house prices still "remarkably" high compared with average earnings and the recent slowdown in loan approvals.

In other words the threat of higher house prices and imports will encourage higher rates rather than the opposite. Inflation is real. Its TTRTRates.

[bubbleturbo]

On housing, King noted that house prices have recently increased by more than the MPC anticipated.

However, he warned that that may not carry on, with house prices still 'remarkably' high compared with average earnings and the recent slowdown in loan approvals.

Hopefully the prices will start to stagnate and fall back, just as they raise the rates.

Nice for sentiment and back to reality for the muppets.

I think the possibility of rate rises will scare off a few BTL's into dumping stock.

[munimula]

THIS IS VERY VERY RELEVANT

Import price inflation rose to its highest rate for five years,

reflecting both the impact of higher energy prices and

increased global capacity pressures. If oil prices stabilise, then

import price inflation can be expected to fall back.

CPI inflation has been close to the 2% target in recent months,

easing slightly to 1.8% in March. The latest increases in

energy prices are likely to push inflation back above the

target in the short term. The extent to which the presently

subdued rate of inflation in the non-energy components of the

CPI will persist once the temporary influence from higher

energy prices abates remains a source of considerable

uncertainty.

Low import inflation is the reason our inflation is so low. It offsets the greater inflation in services, energy etc.

[Realistbear]

THIS IS VERY VERY RELEVANT

Low import inflation is the reason our inflation is so low. It offsets the greater inflation in services, energy etc.

Once the sheeple stop buying the tat (MP3 players etc) the Basket of deflating items will have to be replaced with things the sheeple must buy and THEN reality in the rate of inflation will emerge.

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

From the BoE report, Doesn't look like an IR rise until later this year (September at the earliest IMHO).

Edited May 10, 2006 by gruffydd

[El_Pirata]

bank sees inflation on target in two years.

Reuters seem to have the wrong end of the stick as usual. The bank sees growth on target in 2 years' time, not inflation.

"In the Committee’s central projection, under the assumption that official interest rates follow a path implied by market yields, GDP growth remains close to its historical average."

The box about money growth is worth a look

http://www.bankofengland.co.uk/publication...ort/ir06may.pdf

[Sledgehead]

Thanks guys for picking over that. Good to see that HPC is still one of the few places that gives the inflation report a good raking over.

Cheers

[Jason]

BBC: http://news.bbc.co.uk/1/hi/business/4757161.stm

The BBC still have problems accepting increasing interest rates:

"Despite the Bank's comments, analysts said a rise in rates before the end of the year appeared unlikely."

[zag2me]

Was listening to it on Radio 5, they seemed to think no change for a while yet and "steady as she goes" on the interest rate front.

[BuyingBear]

The BoE has also changed their repo activities, banks are no longer obliged to settle up their debts at the end of each day... they just need to keep an average over the month Mr Tucker said this will provide flexibility in times of stress. Then Merv jokingly refered to the 140 year anniversary of the collapse of

Overend, Gurney and Company, and thus Lombard Street

[kingofnowhere]

FWIW here are the interest rates the BOE used to calculate that inflation would be on target

2Q06	4.53Q06	4.54Q06	4.61Q07	4.62Q07	4.73Q07	4.84Q07	4.81Q08	4.92Q08	4.93Q08	4.94Q08	4.91Q09	4.82Q09	4.8

[teddyboy]

So are we saying that the next rise may be 0.1% and not a 0.25% rise?

Thats gonna change fook all !!!

/me loads gun!

TB

[IMupNorth]

Alarm Bells RINGING, very LOUD and CLEAR ......

How much plainer can the BoE make it, that they have no need or intention of raising IRs this year and the most you can hope for next year is just one 0.25% rise.

Basically, the economy is doing brilliantly - growth on target, inflation on target and IRs staying low at 4.5% - get used to house prices at these levels, they aren't going to drop.

When are you bears going to wake up to reality ?