Growth in the UK is slowing, however, inflation as measured by consumer prices is not. The same holds true in China, and the US.

Bloomberg reports Pound Surges, Gilts Slump After Bank of England Lifts Inflation Outlook

The pound gained versus the dollar and the euro after the Bank of England said it sees inflation “markedly higher” in the near term, boosting speculation that borrowing costs will rise from record low levels. Gilts slumped.

Sterling advanced versus all but one of its 16 major counterparts, snapping a two-day decline against the shared European currency. “There is a good chance that inflation will reach 5 percent later this year and it is more likely than not to remain above the 2 percent target throughout 2012,” the bank said in its inflation report today. Risks to economic growth are “skewed to the downside,” the report added.

“People are bringing forward their predictions of when the BOE will make its first move on rates; that’s making sterling look like a reasonably sensible buy at these levels,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London.

Money markets expect a full 25 basis-point increase in the central bank’s key rate to December, Tullett Prebon Plc sterling overnight interbank average data show. Before the report, investors were factoring in a quarter-point rise in January.

Bank of England Signals Rate Hike

MarketWatch reports Bank of England signals rate hike likely this year

The Bank of England signaled Wednesday that its key lending rate is likely to rise before the end of the year in order to bring inflation back down to target by 2013.

The central bank lowered its outlook for growth, but raised its inflation expectations in its quarterly inflation report.

The report, which lays out the rate-setting Monetary Policy Committee’s economic assumptions, warned that inflation could hit 5% by the end of the year and “is more likely than not” to remain above the 2% target in 2012. The bank said its near-term inflation profile was “markedly higher” than in February.

Assuming interest rates follow market expectations, the inflation rate is likely to return to target by 2013, the bank’s forecasts showed. Forward market interest rates imply a bank rate of 0.75% by the end of the year, hitting 1% in the first quarter of 2012 and 2% in the first quarter of 2013.

The BOE’s King acknowledged rates will likely need to rise in the next two years, but said the high level of uncertainty surrounding the outlook for both growth and inflation made it difficult to gauge when a move would come.

Excluding Japan, mired in deflation for decades, the Fed remains the only Central Bank unconcerned about “inflation”.

Source of Inflation

  • Monetary printing everywhere but especially the US and China
  • Rampant, unsustainable credit growth in China
  • Fiscal deficits everywhere, especially US and UK
  • Fed sponsored speculation in commodities

The irony in this mess is that Central Banks purport to want to do something about inflation when they are the cause of it.

Five Course Corrective Action

  1. Abolish the Fed and central banks in general
  2. Abolish fractional reserve lending
  3. Rein in deficit spending
  4. Return to a sound money system
  5. Let the market set interest rates not a group of pathetic, bubble-sponsoring bureaucrats like those on the Fed and the Central Bank of China

Mike “Mish” Shedlock
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