Bank of England upgrades economic growth forecasts

Sir Mervyn King: 'We must press on to ensure a recovery and bring down unemployment'

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The Bank of England has upgraded its economic growth forecast and said that inflation should fall faster than previously predicted.

In his last inflation report as the Bank's governor, Sir Mervyn King said inflation should drop to its target of 2% within two years.

Sir Mervyn said that "a recovery is in sight".

Separate figures showed UK unemployment rose by 15,000 in the first three months of the year to 2.52 million.

However, the number of people claiming Jobseeker's Allowance fell by 7,300 last month to 1.52 million, the figures from the Office for National Statistics (ONS) showed.

Risks to the recovery

Presenting the inflation report, Sir Mervyn said: "Today's projections are for growth to be a little stronger and inflation a little weaker than we expected three months ago.

It's good to see the Bank of England governor raising the growth forecast - for once - and talking about a modest recovery.

But he and everyone else had hoped to see this kind of growth several years ago.

Even the new Bank forecasts don't show Britain's national output getting back to where it was before the crisis until the end of 2014 - and that's if we don't have a lot more bad news from across the Channel.

The Bank also expects inflation to be above the 2% target for at least another two years, at a time when earnings are growing at their slowest rate in more than a decade.

So household incomes will continue to be squeezed, even if the Bank's right that economy is now on the road to recovery.

"That's the first time I've been able to say that since before the financial crisis.

The rate of inflation is now forecast to drop to its target of 2% within two years, whereas in February the Bank said inflation would fall to 2.3% in the same period.

Economic growth this year is now expected to be greater than 1%, up from the Bank's previous estimate of 0.9%.

Sir Mervyn said: "This hasn't been a typical recession and it won't be a typical recovery. Nevertheless, a recovery is in sight."

Inflation has been above the 2% target since December 2009, and currently stands at 2.8%.

The stubbornness of inflation to remain above target is one of the reasons why the Bank has not expanded its bond purchasing scheme, or quantitative easing. Doing so could push inflation higher.

But while the Bank said the outlook was slightly more rosy than it was three months ago, the underlining picture remained subdued.

"The economy is likely to see a modest and sustained recovery over the next three years," the Bank said, though it added that the recovery would "remain weak by historical standards".

Weak demand from the eurozone also prompted the Bank to note that the "main risks to the recovery continue to emanate from abroad".

Figures released earlier on Wednesday showed that France fell back into recession in the first three months of the year, while the eurozone economy as a whole contracted for the sixth quarter in a row.

Misplaced optimism?

David Kern, chief economist at the British Chambers of Commerce, said Sir Mervyn's analysis might be a little over-optimistic.

Bank of England logo The Bank of England says a "recovery is in sight"

"We accept that growth is likely to remain positive, but believe that the speed of the recovery will be somewhat slower than the governor indicated", he said.

"The grim eurozone data also shows that our exporters will face obstacles over the year ahead. We also think that the inflation outlook is slightly worse than the report suggests, and future falls in 2013 and 2014 will not happen as quickly."

The pound rose 0.3% against the dollar to hit $1.5272 after the inflation report was released, although it then fell back.

Despite the more upbeat forecast from the Bank of England, Sir Mervyn said the Bank could not fix the economy on its own.

"Monetary policy alone, however, cannot solve all our problems. There are limits to what can be achieved by general monetary stimulus in any form," he said.

Sir Mervyn is to step down from the post of governor when his replacement Mark Carney takes over in July.

"I've had my say," he said. "Now it's time for the next generation to have theirs."

'Disappointing' jobs figures

Mr Carney is taking over at a time when a lengthy period of falling unemployment has come to an end, according to the ONS.

Employment Minister Mark Hoban described the latest jobs figures as "disappointing", though he also said the falls in claimant numbers and in youth unemployment, along with an increase in vacancies, were reasons for optimism.

But Labour's shadow work and pensions secretary, Liam Byrne, said a lot of the jobs being created "are temporary jobs, self employed or part time", and insisted "there is insecurity in the jobs market right now, that is coming home to roost".

Moreover, the ONS figures also reveal the degree of the slowdown in pay growth.

Average earnings - excluding bonuses - grew by just 0.8% over the year. That is the lowest rate of increase since the ONS began reporting the figure in its current format 12 years ago.

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