The Bank of England cut its forecast for UK economic growth today and said the inflation rate will fall below the 2 percent target in two years as unemployment was reported to have risen the most in almost 16 years.
Governor Mervyn King said the inflation rate will fall below the 2 percent target in two years if policy makers keep the benchmark interest rate at 5 percent. Claims for jobless benefits rose 20,100 in July to 864,700, the biggest increase since December 1992, the Office for National Statistics said today.
The BoE's Quarterly Inflation Report showed the CPI rate rising close to 5 per cent before falling back as the effects of higher food and fuel prices wane and the economy slows or dips into a recession over the next year.
"The next year will be a difficult one, with inflation high and broadly flat. But with monetary policy focused on its task of bringing inflation back to the target, we will come through the adjustment," Mervyn King told a news conference.
The BoE's forecast is for inflation to stand just below the 2 percent target if rates move in line with the market yield curve. This assumes borrowing costs staying almost flat over the next year.
Risks to the inflation forecast are on the upside, the bank said.
The central bank said GDP would be "broadly flat over the next year or so", before picking up quickly to a rate of around 2.4 percent in two years. This was a lower profile than that forecast in May and the bank said risks remained on the downside.
Futures markets priced in a greater than even chance of a rate cut by the year-end.
Unemployment
The Office for National Statistics reported that there has been an increase in the number of people in employment but the employment rate has fallen. The number of unemployed people, the unemployment rate and the claimant count have all increased. The number of inactive people of working age has fallen slightly but the inactivity rate is unchanged. The number of vacancies has fallen. Growth in average earnings, both excluding and including bonuses, has fallen.
In the latest reference period the working age employment rate was 74.8 percent, down 0.1 percentage point from the previous quarter. The number of people in employment increased by 20,000 over the quarter.
The unemployment rate was 5.4 per cent, up 0.2 percentage points from the previous quarter. The number of unemployed people increased by 60,000 over the quarter. The claimant count was 864,700, up 20,100 from the previous month - the highest monthly rise since December 1992.
The number of vacancies was 634,900, down 47,400 from the previous quarter.
The AEI (Average Earnings Index) - including bonuses - was 3.4 per cent, down 0.4 percentage points from the previous period. The AEI - excluding bonuses - was 3.7 per cent, down 0.1 percentage point from the previous period.
