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The August Inflation Report was broadly in line with expectations. The MPC lowered its GDP forecast, reflecting the recent weakening in surveys of household and business confidence, the perception that credit conditions are not easing as quickly as had been expected, and the additional fiscal consolidation measures announced in the emergency Budget. As a result, the medium-term outlook for inflation was a little weaker than that in May.
Even so, the VAT hike planned for January means that the MPC now expects inflation to stay above target for most of the next 18 months. The projected persistence in above-target inflation has led to concern on the MPC that inflation expectations might rise, which Governor King noted would be "costly" to reverse. The latter explains why the projected undershoot of the inflation target in the medium term has yet to prompt further policy loosening.
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