Bank Predicts CPI Below Target In 2 Years

(Reuters) – INFLATION WILL BE well below the 2% target in two years if interest rates rise in the first quarter, the Bank of England said today, suggesting markets are pricing in rate hikes too early.

In its quarterly Inflation Report, BoE projections showed CPI inflation at around 1.4% in two years’ time if rates follow the path implied by market expectations — rising to 0.7% in Q1 2010 and going up thereafter.

But assuming interest rates stay at a record low of 0.5% and the BoE reaches its £175 billion quantitative easing target, ‘the risks of inflation being above or below the 2% target at the two year horizon are broadly balanced, albeit that the path of inflation is rising.’

The latest forecasts are likely to raise expectations that the Bank will keep interest rates where they are for some time to come; or even have to further expand its quantitative easing programme to get the economy growing strongly again.

While the inflation profile was similar to that published in May, the outlook for growth was ‘somewhat stronger’ given the extra stimulus pencilled in.

The BoE charts show growth returning at the turn of the year and getting close to a rate of 3% in two years’ time.

‘The stimulus should lead to a slow recovery in economic activity, but the timing and strength of that recovery remains highly uncertain,’ the BoE said.

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