UK to Remain Susceptible to High Inflation

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UK to Remain Susceptible to High Inflation

UK to Remain Susceptible to High Inflation



Banks will be in focus today, but not the sort of scandal struck high street and investment banks that have dominated the headlines, rather the central banks of the UK and the Eurozone.

Although the BoE and ECB are completely separate from other banks, considering the amount of negative rhetoric towards normal banks, it's surprising that they have not been hit with wider public disdain.

After all, the BoE has missed its inflation target for so long now that the Governor must have almost run out of ink given how often he's written to the Chancellor to explain the overshoot.

In fact, lowering the benchmark interest rate, whilst the banking sector repairs itself and the flat lining economy attempts to recover, has immeasurably hurt savers and pensioners.

There are also many questions over the BoE's quantitative easing program, which the central bank keeps claiming is doing a good job of propping up the economy. Unfortunately, ordinary people on the street have seen little material benefit from it and prices have risen.

Calls are mounting for the Bank of England to further ease monetary policy in order to boost the economy. The incoming Governor, set to become one of the most powerful unelected figures in the country, has made it clear that he's not worried about the inflation target, but would rather focus purely on growth.

Such a shift would put it in the Federal Reserve's camp, where Ben Bernanke has set a bar of only ending monetary stimulus when unemployment falls to 6.5%.

These measures unfortunately mean that high inflation is likely to remain with us for some time to come.

No doubt this will be a subject of much discussion when the incoming Governor Mark Carney makes his testimony in front of MPs today.

Things are a little different across on the continent however, where deflationary pressures are a little higher than in the UK.

But with the single currency racing higher and LTROs repayments normalising the yield curve, the pressure on the ECB to cut its base rate is mounting.

Importantly though, any future rate cut is not expected to come today.

Meanwhile, this flow of new money and liquidity is fuelling equity market gains and this morning the FTSE 100 is edging higher on the open.

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By Simon Denham, 7 February 2013


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