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Monday, November 15, 1999 Published at 05:56 GMT


Business: The Economy

Inflation broadly on target

Bank of England Deputy Governor Mervyn King presents the report

Inflation looks set to fall next year before picking up again in 2001, the Bank of England has said in its quarterly inflation report.

The Bank's Monetary Policy Committee (MPC) is predicting that the underlying rate - which has undershot the government's 2.5% target for the past six months - will drop below 2% before returning to target in two years' time.

This suggests the Bank does not believe further interest rate rises will be necessary to curb inflation at present.

But the report acknowledges that there are "considerable uncertainties" about its forecasts, with the nine MPC members - who are responsible for setting interest rates - divided on the likely outcome.

Strong pound

While some thought inflation would turn out to be stronger than the forecast, others said it could be up to 0.5% weaker than the official projection.

Much of the uncertainty centres on the strength of sterling, with members split on whether the pound will remain at its present high value.

While the forecast was based on sterling falling back, removing the current dampening effect on inflation, others believed it would remain strong, helping to keep prices subdued.

The report said the Bank's two quarter-point interest-rate rises in the past three months were justified because the medium-term outlook for inflation had become "less benign".

Caution

The Bank has stressed the need for continued "vigilance".

The report says: "Because monetary policy decisions take time to work through the economy, interest rates must be set with a view to influencing prospective inflation, uncertain though that is.

"To that end, monetary policy has been tightened pre-emptively since the summer to counter the prospect of inflationary pressures building in the medium term."

The report cited rising average earnings, surging consumer demand and a "tightening" of the labour market with unemployment continuing to fall, as pointing to a pick up in price pressures.

Overall, the MPC predicted that the economy would grow by 2.5% to 3% over the next two years, in line with the forecasts in Tuesday's pre-Budget report from the Chancellor, Gordon Brown.



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