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Thursday, 16 November, 2000, 12:59 GMT
'Disco-dancing' data - but low inflation
UK inflation Oct
UK inflation fell in October
Upsets in the world economy are set to infect UK data charts with 'Saturday Night Fever', the Bank of England has warned.

Data over the next few months might bear some resemblance to old-fashioned disco dancing

Mervyn King, Bank of England

But the Bank's Deputy Governor, Mervyn King, predicted low inflation for two years, as economic growth, which has been running at 3.0% a year, slowed to 2.5%.

Mr King said that while the UK economy should continue to grow steadily with low inflation, surprises such as a tripling in oil prices had fostered doubts among economists.

The Bank's Monetary Policy Committee, which sets UK interest rates, "feels more uncertain about the outlook than for some time", Mr King explained in presenting the Bank's Quarterly Inflation Report.

His comments confirmed the view of many economists that the Bank is likely to move soon to change UK interest rates, which have stood at 6% since February.

'Disco dancing'

"At some point there will be shocks in either direction that will pose a challenge to the committee," he said.

Mervyn King, deputy governor, Bank of England
Mervyn King: "At some point there will be shocks"

The upsets would see data charts "bear some resemblance to old-fashioned disco dancing - sharp movements in unpredictable directions creating much excitement, accompanied by a good deal of noise".

The robustness of the global economy, oil prices and the strength of sterling were among threats to stability the committee has highlighted, Mr King said.

"World growth has been rapid but is beginning to slow, and higher oil prices point to a further slight deterioration in the outlook for global activity and inflation," the report said.

This autumn's heavy rainfall may distort data in the short term, the Bank's chief economist Charles Bean said.

"It would not be surprising to see somewhat erratic movements in production and spending, and also in retail prices," he said.

Meeting targets

But the Bank expects underlying UK inflation next year to remain below the upper limit of 2.5% set by the government.

Given the shocks to which the UK economy has been exposed... that stability is perhaps surprising

Mervyn King, Bank of England

In 2002, the underlying rate, which excludes mortgage interest payments, is expected to rise to 2.5%, the report said, compared to a rate of 2.0% at the moment.

The current stability in UK inflation has confounded upsets including the strength of sterling, the crises in emerging markets in 1997 and 1998, and a tripling of oil prices in less than two years, Mr King said.

"Given the shocks to which the UK economy has been exposed... that stability is perhaps surprising," he said.

Budget no threat

But the slow growth in salaries, despite a "tight" labour market, has helped keep inflation low, the report said.

Employment data released on Wednesday showed earnings rising at a rate of 4.1%, below the 4.5% danger point the Bank has identified.

"The committee will continue to monitor developments in this area closely," the report said.

The report also confirmed suspicions that the bank believes the effects of last week's pre-Budget report will have little impact on inflation.

The new measures in the Budget "is expected by the Committee to have little net effect on either growth or inflation."

"The broad fiscal picture is unchanged," he added.

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14 Nov 00 | Business
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