Lack of stimulus suggests 2% inflation, reports Capital Economics

Bank of England BoE Bank 480

The Bank of England’s decision to hold the base rate at 0.5 per cent and not to increase its asset purchase scheme suggest inflation may hit government set target of 2 per cent, according to Capital Economics.

Capital Economics chief UK economist Vicky Redwood says the decision by the Bank of England’s monetary policy committee would have been close, but suggest inflation has hit target ahead of this week’s inflation report.

She says: “The monetary policy committee’s decision to leave policy on hold today would not have been an easy one and the vote could have been quite close. We think that more policy stimulus will be required in the coming months – the question is whether the committee feels it has the tools to deliver it.”

Redwood says another “worrying” possibility is that the committe believes it has reached the limits of what stimulus can achieve.

She adds: “We are pretty sure that the economy will need more stimulus in the months ahead. The committee expects a steady recovery to get underway, yet there are still numerous constraints on the economy and the recent business surveys suggest that underlying output is contracting.”

The economist says the the committee is not out of firepower “yet” and admitting so would not help confidence.

Redwood says there is still further scope for a £50bn boost to the quantitative easing programme, to increase it to £425bn in February.