BoE: Inflation Will Stay Above Target Until 2016

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By Shane Croucher | February 13, 2013 10:06 PM EST

Mervyn King, Bank of England governor, has said there is "cause for optimism" over the UK economy's growth prospects (Reuters)

Britain's economy is ambling forward in a "slow but sustained recovery", the Bank of England said, but stubborn inflation will stay above target until at least 2016

Despite sticky inflation, loose monetary policy will have to support a comprehensive recovery from the financial crisis, which is still threatened by the eurozone crisis.

"Growth is likely to remain weak in the near term. But further out, a continued easing in domestic credit conditions - supported by the Bank's asset purchase programme and the FLS - together with a stronger global backdrop, underpin a slow recovery in both demand and effective supply," said the latest quarterly inflation report from the BoE.

Mervyn King, the Bank's governor who will step down in June, insisted that there is "cause for optimism" over the economy.

In terms of GDP weakness, King said that the sharp decline of the construction industry from the end of 2011 across the whole of 2012 was one of the heaviest weights dragging on output, but this was unlikely to reoccur in 2013.

He also blamed a number of anomalous upward pressures on inflation, such as the tuition fees hike and commodity market volatility, for adding as much as a percent to the headline number, and that these were "out of our control".

CPI inflation has been stuck at 2.7 percent for four consecutive months. It has been above target since December 2009 and will likely rise again in the coming months, potentially hitting 3 percent.

The Bank's Asset Purchase Facility, its central quantitative easing programme, has a target value of £375bn. Many economists think a further £50bn will be added in a final push to help stimulate activity in the dampened economy.

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