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BoE too optimistic on inflation, say experts
16 August 2010
The Bank of England (BoE) is still too optimistic on growth and inflation prospects despite downgrading its forecasts, industry experts have claimed. The BoE's quarterly inflation report said the UK recovery is likely to continue with a forecast of approximately 2.4 per cent growth for next year, but it also admitted risks to growth remained weighted to the downside. These include uncertainty about the outlook for the eurozone and the US, as the Federal Reserve also lowered its growth forecast stating the pace of economic recovery would be "more modest in the near term than had been anticipated". James Carrick, economist at Legal & General Investment Management (LGIM), said both the Federal Reserve and BoE had acknowledged they had been too optimistic in the past and he believed that was still the case, which is why the BoE will not raise interest rates. He added: "I don’t believe they [BoE] believe the numbers they've printed, they're more cautious than they're saying. They are cheerleading the economy but the arguments in favour of slight economic growth are quite limited." Mr Carrick said he believed growth would be lower and inflation would be higher than the BoE predictions but added the bank appeared more worried about credit conditions than in its May report, as the evidence suggested consumers have been scared by government spending cuts. Paul Smith, head of fixed interest at Premier Asset Management, said the gilts market had rallied on the back of the UK and US forecasts while gilt yields had fallen to their lowest level since March 2009. He suggested this might be because of fears of a double-dip recession and a slowdown in the US but added there was "no huge reason for it. But it seems a good time to sell gilts". He warned although inflation was proving stubborn, forecast at approximately 3 per cent in the next quarter, the central bank should not print more money. "If we get a second round of quantitative easing (QE) there will be further inflationary waves which could lead to the UK being downgraded by the rating agencies," he added. Adrian Lowcock, senior investment adviser at Bestinvest, said: "What happens in the wider economy is not necessarily reflected in the same country's stock markets. Private companies have gone through a wide range of cost cutting initiatives and are much better positioned to compete and remain profitable in a slow growth economy." Simon Ward, chief economist at Henderson Global Investors, added: "The suspicion is that the Monetary Policy Committee (MPC) has been spooked by double-dip talk and has taken the opportunity to lower an overoptimistic previous growth forecast." But he warned the bank could "face a rendezvous with reality later this year as the economy defies double-dip pessimism and a continued inflation overshoot leads to a further loosening of inflationary expectations". Published by FTAdviser.com
