After the ONS reported that inflation lingered above target and at 5.0% in October King had to issue an explanation letter for the Chancellor as inflation lingered since October more than 1.0% above target.
In the letter King said that inflation remains influenced as said before by the increase in the VAT and the previous increases in import and energy prices though refrained from including the pound as a fueling factor as used before.
King still sees that without the influence of those temporary factors inflation will likely be below 2.0%. The MPC still sees inflation returning back to target with the waning effect of the temporary factor and softening growth especially with the downside pressure from the slowing outlook for the global economy and the eurozone.
King said that inflation is projected to drop sharply in the next six months or so, and continue falling thereafter to around target by the end of next year.
Nevertheless, King reflected the high uncertainty around the central projections and although they are confident about the direction of change in inflation, which is still seen to the downside, the MPC remains uncertain about the pace and extent of the drop. The risk to the outlook and uncertainty is connected to companies and if they result to restoring profits at the expense of raising prices and from the downside the rising spare capacity will pull inflation lower especially with the implications of a further slowdown in the work economy.
King said that the latest projections and outlook will be reflected in the Inflation Report which is due tomorrow and how the bank is acting to insure price stability. The policy action was to increase the APF unanimously by 75 billion pounds in October. The governor reminded that the UK economy continues to be facing high risk and uncertainty due to the unclear and uncertain outlook for the global economy and reminds that the bank has limits to what it can achieve when real adjustments are necessary but will continue to use the Bank Rate or Asset Purchases to help ease the adjustment of the UK economy.