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Bank of England shows signs of optimism as King prepares to step down

Bank of England governor Mervyn King, who retires in July, is to be replaced by Bank of Canada governor Mark Carney

Story highlights

  • King, who retires in July, is to be replaced by Bank of Canada governor Mark Carney
  • Faster growth in the first quarter of this year led the bank's Monetary Policy Committee to revise its forecasts
  • The MPC also assumed that the hangover from the financial crisis would fade slowly

The Bank of England has become more optimistic about both recovery prospects and inflation in its last set of quarterly forecasts before Sir Mervyn King, the governor, retires.

Faster growth in the first quarter of this year led the bank's Monetary Policy Committee to revise its forecasts slightly higher for the next three years, although the MPC said the recovery remains "weak and uneven".

After years of revising growth down and inflation up, this is the first inflation report since 2007 to paint a generally brighter outlook, although the forecasts still show no return to pre-crisis levels of growth.

With inflation predicted to rise in coming months and to remain above the BoE's 2 per cent target for much of the next two years, the committee's forecasts gave no hint of a resumption of the bank's quantitative easing programme, which creates money to buy assets, but also no sign of a rise in interest rates on the horizon.

The report shows inflation falling to 2 per cent by mid 2015, on the basis that the main bank interest rate remains at its current rock bottom of 0.5 per cent into 2016. In the medium term, "external price pressures fade and a gradual revival in productivity growth curbs increases in domestic costs," the report said.

The MPC said that at its meeting this month in May, "members agreed that a modest and sustained recovery in output was in prospect".

    In a revamped set of forecasts, the BoE's removed some of its notorious secrecy, giving the main forecasting judgments of the MPC for the first time.

    The committee said its slightly more optimistic outlook rested on the expectation that the worldwide economy would begin to recover after recent policy initiatives and the eurozone economy would stop contracting in the second half of 2013.

    The MPC also assumed that the hangover from the financial crisis would fade slowly, bringing a gradual increase in consumer spending and business investment. The growth rate of these components of demand would, however, more likely than not be below historic norms for the foreseeable future.

    The committee expects labour productivity growth to resume slowly, helping to bring inflation back to target in the medium term.