(Updates with credit-rating outlook change in third paragraph, pound and gilts in fifth.)
Feb. 14 (Bloomberg) -- U.K. inflation probably weakened to a 14-month low in January, continuing a slowdown that may determine whether the Bank of England needs to expand its bond- purchase program further.
Consumer prices rose an annual 3.6 percent after a 4.2 percent gain in December, according to the median forecast of 36 economists surveyed by Bloomberg News survey before a report today. The inflation rate will require Bank of England Governor Mervyn King to write a letter to Chancellor of the Exchequer George Osborne.
Policy makers, who forecast that inflation will slow to below their 2 percent target, raised their bond purchases by 50 billion pounds ($79 billion) to support growth. Risks to the outlook prompted Moody’s Investors Service to say yesterday the U.K. could lose its top credit grade. King will publish new economic growth and inflation projections at a press conference in London tomorrow.
“The bank is already predicting inflation falling below target in the fourth quarter, and I share that view,” said Brian Hilliard, an economist at Societe Generale SA in London. “They may do one more increase of 25 billion pounds in May.”
The pound fell 0.3 percent today and traded at $1.5721 at 8:01 a.m. in London. The yield on the 10-year gilt rose 1 basis point to 2.14 percent.
The Office for National Statistics in London will publish the data at 9:30 a.m., while any letter from King, as well as Osborne’s response, will be released an hour later by the central bank.
King forecasts that inflation will slow “sharply” this year, partly as a government sales-tax increase in January 2011 drops out of the annual comparison. In November, the central bank forecast a 1.7 percent rate at the end of this year, falling to 1.3 percent by end-2013. The latest projections will be published in the quarterly Inflation Report at 10:30 a.m. tomorrow, when King will also answer questions on the economic outlook.
The new round of bond purchases announced on Feb. 9, which will take total gilts held by the central bank to 325 billion pounds, will be completed in early May, when the bank will release the results of its subsequent forecasting round.
Turmoil in the euro area has dented confidence in the U.K. and darkened recovery prospects. The economy shrank 0.2 percent in the fourth quarter, its first contraction in a year, while unemployment is at the highest in 16 years. Still, the Confederation of British Industry, the country’s biggest business lobby, said yesterday the economy will avoid a recession and growth will pick up this year.
Moody’s placed the U.K.’s Aaa rating on negative outlook to reflect a “weaker economic environment” and risks from the euro area’s sovereign debt crisis, the rating company said in a statement late yesterday.
Data later this week will show jobless claims increased by 3,000 in January, according to the median of 24 estimates in a Bloomberg survey. The fourth-quarter unemployment rate may have held at 8.4 percent. Retail sales probably fell 0.3 percent last month, economists said in another survey.
--With assistance from Jennifer Ryan and Scott Hamilton in London. Editors: Fergal O’Brien, Simone Meier
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