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UK inflation dares Carney to blink as higher forecast seen

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Mark Carney is looking at above-target inflation this year.

[LONDON] Mark Carney is looking at above-target inflation this year. Will he blink?

It's his first "Super Thursday" of 2017 - a monetary policy decision accompanied by new forecasts and a press conference - and economists expect officials to raise predictions while keeping the key interest rate at a record low and bond purchases unchanged.

The Bank of England governor will probably argue that the risks from Brexit mean that faster growth and inflation shouldn't warrant tighter policy any time soon.

Here are five charts that officials might have been looking at as those factors begin to show up in economic data.

Consumer Spending

British consumers, the bulwark of the economy that have continued to fuel growth since the referendum, are starting to show signs of strain. Retail sales dropped the most in almost five years in December, and data from the BOE published this week showed a slowing in household borrowing.

Rising Inflation

Households are likely reacting to an upswing in inflation that's set to continue throughout the year. Price growth accelerated to 1.6 per cent in December, and the BOE said in November that it will be above its two per cent target both this year and next as the pound's 15 per cent fall since the referendum boosts import costs. The majority of economists in a Bloomberg survey see the Monetary Policy Committee raising its inflation forecast for this year.

While policy makers have said they'll look through a period of above-target inflation, upward revisions to price growth pose a communications challenge for the BOE as it keeps policy unchanged in the face of a robust economy.

Skewed Growth

Mr Carney has hinted the BOE will revise up its forecasts, but he's still likely to emphasize the slowdown this year and next, according to Bloomberg Intelligence economist Dan Hanson. Regardless of the deal eventually secured with EU leaders, consumers are set to spend less in the coming months as inflation accelerates. Britain's dominant services industry, which currently benefits from the EU single market, is also likely to be hit by an exit from the bloc, the National Institute of Economic and Social Research said Wednesday.

Market Bets

While Mr Carney may play down any potential policy reaction to above-target inflation, investors are growing increasingly unconvinced that the MPC will continue to hold a neutral stance. Traders are pricing in a greater probability of a hike than a cut, and see an almost 50 per cent chance of a rate increase by the end of the year.

As policy makers grapple with the trade offs they face, part of their initial response to the Brexit vote is drawing to an end. The six-month, £60 billion (S$107.401 billion) extension to government bond buying announced in August looks set to reach completion by the close of this month. None of the economists surveyed by Bloomberg expect the BOE to expand the quantitative easing program further on Thursday.

"The BOE is in a bit of a tricky situation," Andrew Bosomworth, head of portfolio management in Germany for Pacific Investment Management Co, said in a Bloomberg Television interview.

"Carney will emphasise more of an optimistic view, feed in some of that correct to the initial thoughts - we'll probably see that in the growth forecasts. But he's going to have to emphasise that there are upside as well as downside risks given that uncertainty" surrounding Brexit.


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