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ITEM urges Bank of England to “hold its nerve”

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17th Jan 2011
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The Ernst & Young ITEM Club’s quarterly winter 2010-11 forecast is urging the Bank of England Monetary Policy Committee (MPC) to "hold its nerve" in a difficult year ahead.

While the UK faces a year of soaring inflation, the ITEM Club warns that any increase in bank base rate would be premature and could endanger the economic recovery. Inflation is expected to drop back to the 2% target in 2012 once temporary pressures fall out of the economy.

Peter Spencer, chief economic adviser to the ITEM Club said: “It’s going to be a tense start to 2011. The fiscal retrenchment will keep GDP subdued, while commodity price rises and the VAT hike will push inflation close to 4% and leave the MPC agonising over whether to increase the bank base rate.

“However it’s vital that the MPC stands firm. These are temporary pressures, domestic cost inflation remains low and CPI inflation will come back to heel in 2012 once the VAT increase falls out of the figures next January. A premature rate rise would boost the pound, weakening the UK’s ability to increase its exports - particularly into the emerging markets - which we have long maintained hold the key to the UK’s economic recovery.”

The forecast says that the CPI will peak at nearly 4% in February and cautions that the Bank of England may come under mounting pressure to raise its base rate.

As government austerity measures take effect, inflationary pressures will be coupled with below-trend GDP growth - expected to be 2.3% this year, rising to 2.8% in 2012.

In addition to rising commodity prices, the VAT hike, and the increase in employees’ National Insurance Contributions this April, ITEM also expects wage increases to remain below inflation throughout the year.

There is also a significant risk of further increases in unemployment, given the cuts to public spending.

The non-governmental economic forecasting group is predicting that the unemployment count will increase marginally to 8.1% this summer before falling back to 6.8% by 2015.

There will also be no respite for consumers in the ongoing trend of the drop-off in the UK housing market. ITEM expects house prices to fall by more than 5% in the next year, with only a gradual recovery in housing transactions in 2012.

The good news in the winter forecast is that business investment and exports look set to increase this year.

With business investment set to increase by 9.4% this year and accelerating to 13.9% in 2012, Spencer continued: “Corporates have both the means and motivation to increase their capital spending. A weak domestic market provides the incentive to explore more opportunities overseas, particularly in the emerging markets. They will also be conscious that, excess cash on the balance sheet could potentially leave them vulnerable to takeover bids.

“Once companies are confident that the austerity measures are working, and this is reflected in the key economic indicators, there will be pressure to invest or return profits to shareholders.”

ITEM also believes that 2011 will be a good year for exports, with UK exports forecast to grow in line with world trade, capitalising on the opportunities in the emerging markets and the weak pound.

Spencer explained: “2011 should see a stronger performance from UK exporters. However, the UK needs to build better trade relations with the emerging markets. Following the decade of the strong pound, the UK missed out on an opportunity to expand its exports into Asia and other rapidly growing markets, instead focusing on trading with our European cousins –which are now forecast to grow at a much slower rate. We are geared in to the wrong markets, and the investment required to refocus on the emerging economies is going to take several years.”

Spencer concluded: “We are on a rocky road to redemption. It will undoubtedly be a tough year, particularly for employment, wages, housing and the high street, while many major uncertainties also remain around the actual impact of Osborne’s austerity measures. The growth in the UK economy all hinges on some major ‘ifs’ and ‘buts’ - the most significant of which, in the next 12 months, is going to be whether the MPC maintains the Bank base rate at 0.5%.”

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By User deleted
17th Jan 2011 14:50

mmmm .... is it all about forcing savers to spend

Have a look at this by Marc Faber - http://www.youtube.com/watch?v=H0sS6a9RW2E

The interesting part about '.. zero interest rates create new bubbles ..' starts at 30/31 minutes into the video

'.. people are saving money rather than spending it ... and we have to get these bast...ds to spend and not save ..'

So the easiest solution is that we just create inflation of 6% pa at which point the worst investment is cash so don't hold onto it - spend instead

All this is completely apart from hanging all pensioners out to dry - so not only have their taxes assisted the banks but their savings are also now being attacked to underwrite all those mortgage holders who are/or will be in negative equity if interest rates go up

Inflation stepped up and reached an annual level of 3.7%, significantly higher than 3.3% that was expected and hand in hand the GBP/USD now trades at 1.6045

Perhaps these experts from EY would care to set an inflation level at which interest rates should rise or don't they want to commit themselves; after all any trade or comment must have an exit strategy at which it becomes unviable
 

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