Inflation will peak at 5% in the coming months while economic growth will remain "flat" until well into next year, the Bank of England (BoE) predicted today.
BoE governor Mervin King, speaking at the Inflation Report press conference, says the UK economy is going through a “difficult and painful adjustment” which “cannot be avoided”.
However, King says he is confident the economy will “come through” the adjustment and return to a decade which will be considered “not so bad”.
He says rising food and energy prices have pushed up CPI inflation to 4.4% in July and predicts recent announcements of rises in retail gas and electricity prices will see inflation “peak at around 5% in the coming months”.
He says the continued adjustment of banks’ balance sheets has resulted in a “monetary squeeze” and tighter credit conditions and that the projection for GDP growth is “broadly flat” over the next year.
In addition, King says the Monetary Policy Committee “continues to face a balancing act” between the upside risks and the downside risk that a more prolonged slowdown could pull inflation well below target.
“The adjustment of the UK economy to higher commodity prices and a more realistic pricing of credit will be painful,” he says.
“The next year will be a difficult one, with inflation high and output broadly flat. But with monetary policy focused on its task of bringing inflation back to the target, we will come through the adjustment.
“And we will return, if not to the nice decade, than at least to one that, as central bankers say, is not so bad.”
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