BoE forecasts higher inflation

In the UK, the Bank of England’s inflation report forecast that inflation will gain pace from the two-year high reached in January and peak at approximately 4.4% before easing again to the BoE’s target by mid-2012. Governor Mervyn King said the bank may need to keep borrowing costs low to help the economic recovery.

The UK’s growth outlook has also worsened with Britain about to endure a budget squeeze which will result in 330,000 jobs being lost at a time when unemployment is already rising.

In fact, the number of people claiming unemployment benefits rose by 2,400 in January. This was an unexpected rise as economists had been expecting a drop of 3,000.

The wider International Labour Organisation measure showed that the number of people without a job in the three months to December rose by 44,000 to 2.49m, while the jobless rate remained stable at 7.9%.

In the US, the Federal Reserve Federal Open Market Committee minutes confirmed that the Fed was more optimistic over the economic outlook. However, there were also references to unemployment being too high and still no indications that the Fed would move towards a tighter policy.

Meanwhile, consumer prices data was slightly stronger than expected with a 0.4% headline increase while core prices rose 0.2%.

Other economic indicators were significantly weaker than expected as retail sales rose 0.3% in January, lower than the 0.5% market expectations. Meanwhile, industrial data also disappointed as output fell 0.1% in January after rising by a revised 1.2% in December.

Housing market data was mixed as a larger than expected increase in starts was offset by a fall in permits to an annual rate of 0.56 million from 0.63m the previous month.

In the eurozone, data was slightly weaker than expected with fourth-quarter GDP estimated at 0.3% compared with expectations of 0.4%, and there was a further sharp contraction in the Greek economy.

Meanwhile, during the same period, German economic growth was also less than expected, as GDP rose 0.4%, against expectations of a 0.5% rise. In the eurozone’s second largest economy, France, the economy grew by just 0.3%, or half the forecasted increase, while Greek and Portuguese economies contracted.

The lower-than-expected pick-up in growth was partly due to the cold weather that curbed output.

Meanwhile, industrial output in the then 16-country euro area fell 0.1% in December, despite economists’ optimistic outlook of the recovery across the region’s weaker peripheral countries.

This article has been prepared by Bank of Valletta plc for general information purposes only.