MercoPress. South Atlantic News Agency

UK consumer inflation forecast expected to peak at 3.5% (well above 2% target)

Bank of England Governor Mervyn King

The Bank of England has lifted its inflation forecast saying it now expects consumer price inflation will peak at 3.5% - well above the previous forecast of 3%. BoE Governor Mervyn King said CPI inflation rose sharply to well above the 2% target in December and is likely to have risen further in January

That means the Governor will have to write another letter to Chancellor Alistair Darling explaining why inflation is more than 1% ahead of target. Inflation rose to 2.9% in December - already well above where the Bank had said it would be in January.

King described the outlook for inflation as “highly uncertain” but said it was expected to be below the 2% government target for most of the forecast period covered by the inflation report and would be at around 1.2% at the beginning of 2012.

“Inflation is strongest in the near-term. It is likely to fall below target as the margin of spare capacity wears down” he said.

King said the fact that inflation had come in ahead of expectations was down to the rising price of oil and the VAT increase. The Bank is still certain inflation is under control and will remain within target, which suggests interest rates could remain at record lows for many more months

King also conceded the outlook for UK economic growth is uncertain and growth could be blown off course if the global economic recovery falters or domestic spending falls away.

“The outlook for growth is underpinned by the considerable stimulus from the easing in monetary policy, and supported by global growth and the past depreciation of sterling”.

But he said the downside risks are less pronounced now than they were previously.

King also said that the Bank of England was ready to extend its asset purchase program if necessary. “It is far too soon to say whether more purchases will be needed”, he said.

“We would buy more if needed to keep inflation on track”.