UK inflation to beat BoE target for next 4 years: NIESR

LONDON, Aug 9 (Reuters) – The Bank of England will not be able to return inflation to its 2% target before 2028 at the earliest, according to forecasts by a leading academic think tank that warned the British economy was succumbing to the stagnation.

The National Institute for Economic and Social Research (NIESR) forecasts that inflation will fall from 7.9% today to 5.2% by the end of 2023, but will slow thereafter, averaging just over above the BoE’s 2% target in 2025, 2026 and 2027.

The economy would grow a meager 0.4% this year and 0.3% in 2024, little changed from NIESR’s growth forecasts three months ago of 0.3% and 0.6% for this year and the next.

“Inflation, political turmoil, the slowdown in the global economy, oil crises, strikes — there are many nouns that resonate with the 1970s,” said NIESR director Jagjit Chadha.

“And there is the resurgence of the ‘British disease,'” he added, referring to stagnant growth at a time of rising prices.

British economic output is not on track to return to its pre-pandemic peak until the end of 2024, representing zero growth over a five-year period, NIESR predicted.

By the end of 2024, there was even a 60% chance that the economy would slip back into recession as it faced problems such as a shortage of skilled workers, low productivity, lack of public investment, and underdeveloped regional economies.

“Brexit has done a great service by revealing even more clearly the underlying problems in the British economy, but it has yet to find solutions,” Chadha said.

NIESR’s near-term growth forecasts are similar to those announced by the BoE last week, but its inflation forecast is higher than the central bank’s projections for price growth to fall below its target of 2 % in 2025.

Unlike the BoE, NIESR expects wage growth to hold at 6% next year and this year due to a lack of candidates to fill vacancies, easing some pressure on living standards but increasing costs to employers.

British inflation is currently the highest of any advanced economy, but NIESR expects the BoE to raise interest rates just one more time to as high as 5.5%, after last week’s rise to 5.25%.

The BoE had been having trouble explaining its policy strategy to financial markets and appeared to be hurt by individual data that came out higher than expected, NIESR said.

“Communication hasn’t been clear,” said NIESR deputy director Stephen Millard, a former BoE economist.

Rather than talk about multiple potential paths for interest rates to return inflation to target, as it did last week, the BoE would be better off setting out clearly how it would decide whether rates are high enough to return inflation to 2 % added.

Reporting by David Milliken Editing by William Schomberg

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