August Inflation Report - the key points

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The Governor of the Bank of England started the Inflation Report press conference remarking that, since May, the mood in the markets had taken a sharp turn for the worse. The outlook for global growth had deteriorated, and as a result so had the outlook for near-term growth in the UK.

The Bank's central forecast remains for a modest recovery in output while CPI inflation should spike at around 5% this year before falling back in 2012. The MPC's projections show the path of interest rates as being almost 1 percentage point lower than was forecast in May. King said that the balance of risks was weighted on the downside.

Key points:

Growth will be impacted by global instability

  • The UK is heavily impacted by global factors, and global headwinds are now stronger than they were three months ago.
  • Ongoing problems in the Eurozone are expected.
  • The biggest risk to the UK's recovery is the volatility in the global economic situation and its impact on trade. Nevertheless, growth in the UK should be a bit stronger in the second half of the year

The income squeeze on households should abate in 2012

  • The inflation report shows that gas and electricity prices are likely to lead to a short-term spike in inflation but after that squeeze in living standards should start to abate
  • The MPC still see inflation expectations as the biggest upside risk to inflation, but King said that he thought the general public recognised that inflation would fall back next year

The MPC could yet extend QE

  • King emphasised the MPC's flexibility to act depending on the changing economic situation
  • He said the Bank would not make a US Fed-style announcement about the future path of interest rates. He added that the markets already expected rates to remain low in the UK
  • If the MPC thought inflation would be below target King said there would be no impediment to further asset purchases, though he ruled out using other monetary tools.

The margin of spare capacity may be less than previously thought

  • Charlie Bean said that the margin of spare capacity in the economy may be lower than had previously been thought
  • He said that this could imply there would be less room for growth before inflationary pressures related to capacity started to become apparent

The full inflation report is available here.

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