BoE: Gloomy Outlook

Wookster

Gloomy outlook expected from Bank of England
The Bank of England is expected to give a gloomy assessment of Britain's short-term prospects this week, forecasting weak growth and high inflation.

By Angela Monaghan
Published: 10:38PM BST 08 Aug 2010
The Bank's August Inflation Report, to be published on Wednesday, will show that the Monetary Policy Committee (MPC) will fail to meet its remit of 2pc inflation for much of next year. In its May report the Bank predicted inflation would fall back to target in 2011.
The Bank is also expected to lower its May forecasts for growth of 3.2pc next year and 3.4pc in 2012, to take into account the impact of the austerity measures of the emergency Budget, a renewed credit squeeze, and the risks posed to the domestic economy by a potential slowdown in the US and eurozone – Britain's biggest export markets.

http://www.telegraph.co.uk/finance/economics/7933403/Gloomy-outlook-expected-from-Bank-of-England.html

I question how long base rates can stay at 0.5% with the current inflation predictions in the article.

nembot

I don't think they will stay the the levels they are now for an extended period of time, when needs must - it'll happen and will undoubtably bring an end to fantasy house prices, bout bloody time too!

wymondham

I still think rates will rise before lots have predicted....

Generali

wymondham wrote: »

I still think rates will rise before lots have predicted....

My suspicion is that if/when rates start to rise they may end up having to come back down again. There's an awful lot of debt out there still.

vivatifosi

I don't see how the BoE can be responsible for holding down inflation if the government is going to put up VAT by 2.5%. What will be interesting to see is what inflation will look like underneath that. For me, that's the figure that needs to be trended as to do otherwise isn't a true like-for-like comparison. AIUI for this year, the VAT increase that we've already had is a big component in inflation this year and below that inflation is less problematic. That's the issue with VAT raises, they are neither indicative of increased prices due to increased demand or supply shortages, or stagflation type issues getting out of control.

michaels

Forecast rising prices and weak economy - how does that wrok? I guess the answer is imported and govt imposed (eg vat) inflation. Will interest rate increases have any impact on inflation from these sources?

Generali

vivatifosi wrote: »

I don't see how the BoE can be responsible for holding down inflation if the government is going to put up VAT by 2.5%. What will be interesting to see is what inflation will look like underneath that. For me, that's the figure that needs to be trended as to do otherwise isn't a true like-for-like comparison. AIUI for this year, the VAT increase that we've already had is a big component in inflation this year and below that inflation is less problematic. That's the issue with VAT raises, they are neither indicative of increased prices due to increased demand or supply shortages, or stagflation type issues getting out of control.

A one-off rise in prices like that doesn't cause inflation by itself as inflation is a persistant tendancy for prices to rise, not just an increase in prices.

What can happen is that a one off increase in prices causes workers to demand more money which increases employers' costs which causes prices to rise so workers want more money and so on. Right now with unemployment at 2,500,000 and set to rise, that cycle is unlikely to get going as workers won't be able to get the pay rises.

michaels wrote: »

Forecast rising prices and weak economy - how does that wrok? I guess the answer is imported and govt imposed (eg vat) inflation. Will interest rate increases have any impact on inflation from these sources?

There will only be a one-off rise in prices IMO (as per the above) as a result which isn't inflation. The RPI/CPI etc will rise but that's really a measure of the price level, not inflation strictly speaking.

chucknorris

Isn't the high inflation going to be short lived though? The thing about inflation is that it is a measure of a change to the previous period, so once we have had the VAT rise etc will we not simply revert to lower inflation as the effects of the public sector spending cuts dampens the economy.

chucky

Wookster wrote: »

http://www.telegraph.co.uk/finance/economics/7933403/Gloomy-outlook-expected-from-Bank-of-England.html

I question how long base rates can stay at 0.5% with the current inflation predictions in the article.

why do you need to increase rates to combat inflation...

why do people still think that increasing rates is the only way to try and deal with inflation...

chucknorris

chucky wrote: »

why do you need to increase rates to combat inflation...

why do people still think that increasing rates is the only way to try and deal with inflation...

Higher interest rates were seen as the correct tool to control inflation when the economy was doing well, perhaps the boe will come to the conclusion that during a downturn using interest rates is not appropriate (aren't they already thinking this way right now).

We look as if we are in a for a tough 2-3 years, just as well I have decided to come out of retirement and I start my new job at the end of this month. Luckily I come to this decision for non financial reasons as I felt I retired far too early, so I have decided to try university lecturing which has always interested me, but I was always too busy working in industry to think about trying it.

chucky

chucknorris wrote: »

Higher interest rates were seen as the correct tool to control inflation when the economy was doing well, perhaps the boe will come to the conclusion that during a downturn using interest rates is not appropriate (aren't they already thinking this way right now)

inflation is secondary at the moment, trying to fix the economy is the primary reason rates are low. no other reason