In the report, the Bank said “there is a good chance that inflation will reach 5%” at some point this year, and suggested the figure would “more likely than not” stay above its 2% target for the whole of 2012.
Noting that the forecast was “substantially higher” than that made in its previous quarterly report in February – the BoE had previously said inflation would fall back below target next year – the Bank said the change reflected further rises in energy prices and the associated higher likelihood of “substantial” increases in domestic utility prices over the next 12 months.
“The precise timing and extent of that decline in inflation are uncertain, and will be sensitive to the extent of any further pass-through from the past depreciation of sterling, and to the evolution of energy and commodity prices”, the report said.
The Bank also cut its UK growth forecast, citing a “more gradual recovery in consumption and a less pronounced boost from net exports”. But Stewart Robertson, senior economist, UK & Europe at Aviva Investors, said the report shows the BoE is “reasonably content with the current state of play”.
“I believe the Bank will not respond to higher CPI inflation by an early rise in rates. If the recovery continues – no renewed slowdown – then rates will have to start going up again, but it will be a slow process and there is no urgency to raise rates and a first rate rise may potentially not even happen this year,” Robertson said.
