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AMP ANALYSIS OF BANK OF ENGLAND INFLATION REPORT

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In its latest quarterly inflation report, published yesterday, the Bank of England has lowered its inflation foreca...
In its latest quarterly inflation report, published yesterday, the Bank of England has lowered its inflation forecasts, reinforcing expectations amongst City economists of another cut in UK interest rates. Specifically, it is now forecasting sub-2.5% inflation in two year's time.

Mervyn King, the bank's chief economist, said the new forecast showed that the quarter point cuts in base rates in December and January had been justified. But he warned that the report should not be seen as a 'green light' for further significant rate cuts.

In the Bank of England's previous report, published in November, it was more pessimistic about the outlook for inflation. This latest report admits that growth was significantly weaker in 1995 than initial estimates suggested, improving the outlook for inflation.

However, the picture is not all rosy. The bank does recognise some upside risks, notably the current rapid rate of growth of the broad money supply and a forecast acceleration in consumer spending later this year. For the moment it remains undecided on these upside risks, arguing that it is too soon to tell if, and when, the inflation target will come under threat.

The bank expects any further fall in GDP growth to be temporary, lasting only as long as it takes companies to clear shelves of unsold goods. However, it recognises that there is a risk of a more protracted slowdown if conditions abroad continue to deteriorate. Specifically, problems could arise if spending remains weak in the UK's main European export markets, France and Germany.

This morning's publication of January's RPI data was encouraging, and leant some weight to this latest Bank of England Report. It showed the headline inflation rate falling from 3.2% to 2.9%, and the targeted RPI, ex mortgage payments, falling from 3.0% to 2.8%.

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