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Bank faces 'tough balancing act' Bank hints at limited rate cuts
(20 minutes later)
The Bank of England says it faces a "difficult balancing act" as the UK economy experiences slower growth and the risk of accelerating inflation. The Bank of England has signalled that the scope for further cuts in interest rates is limited, despite slow growth, after it forecast higher inflation.
The Bank predicted that growth would slow sharply to less than 2% by the end of 2008, from about 3% at present. The Bank predicted that UK growth would slow sharply to less than 2% by the end of 2008, from about 3% at present.
But the Bank also said it expects inflation to remain above the government's target of 2%, and forecast it could rise as high as 3%. But the Bank also said it expected inflation to remain above the government's target of 2%, and forecast it could rise as high as 3%.
That could mean fewer interest rate cuts than financial markets expect. This could mean fewer interest rate cuts than financial markets expect.
Governor Mervyn King said that "it is the outlook for inflation, in the medium term" that the central bank's Monetary Policy Committee (MPC) will remain focused on. "The Bank of England's February Inflation Report has given a pretty strong signal that, for now at least, the Monetary Policy Committee does not expect to cut interest rates as far and as fast as the markets currently anticipate," said Jonathan Loynes at Capital Economics.
Mr King said it was likely that the rate of inflation would hit 3% by the middle of this year, which would require him to write a letter of explanation to the government. Many economists have said they expect interest rates to fall as low as 4.5% by the end of 2008 from 5.25% currently.
The comments come amid increasing signs that problems in global financial markets, a strong pound, and earlier increases in the interest rates are creating problems for the UK economy. Balancing act
Bank governor Mervyn King said that the bank faced a "difficult balancing act" and it was "the outlook for inflation, in the medium term" that the central bank's Monetary Policy Committee (MPC) would remain focused on.
Mr King added it was likely that the rate of inflation would hit 3% by the middle of this year, which would require him to write a letter of explanation to the government.
However, he anticipated that the rise in inflation would be temporary and would be due to increases in imported energy and food prices that were unlikely to recur.
"This is not something you can offset by asking for higher wages," he said.
January's consumer prices index (CPI) inflation figure rose to 2.2%, up from 2.1% in December and the highest rate since June.
The increase was due to rising fuel and food prices, and it kept the CPI figure above the government-set target of 2%.
Mixed mood
Mr King's comments come amid increasing signs that the disruption in global financial markets, a strong pound, and earlier increases in the interest rates are all creating problems for the UK economy.
The Bank cut UK interest rates last week to 5.25% from 5.5% in an attempt to prevent a major slowdown in the economy.The Bank cut UK interest rates last week to 5.25% from 5.5% in an attempt to prevent a major slowdown in the economy.
Many economists have said they expect interest rates to fall as low as 4.5% by the end of 2008, though that will be difficult to achieve if inflation does not come down from its current levels. However, Mr King said that while the picture painted by those working in financial and housing markets was bleak, the mood outside London and in other areas of the economy was not as bad.
Last month's consumer prices index (CPI) inflation figure rose to 2.2%, up from 2.1% in December, the highest rate since June. "Don't be taken in by too many of the analysts who are perhaps coloured somewhat by the environment within which they have to work in the financial sector. Getting outside is a pretty good antidote to that," he said.