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May 2010 Commentary

Economy grows by 0.3% 25th May 2010

Cash Figures released this morning by the Office of National Statistics showed that Gross domestic product (GDP) increased by 0.3% in the first quarter of 2010. This figure has been revised upwards from the preliminary estimate of 0.2% and is due to upward revisions to production. GDP is 0.2% lower than the first quarter of 2009.

Adam Posen, an external member of the Monetary Policy Committee, speaking at the London School of Economics last night, said that the economic recovery would not be strong and deflation could not be ruled out:

"The UK worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. More active investors and greater openness in the UK than in Japan may be able to turn this around."

Taken with the comments in last week's MPC minutes, it looks like the fragility of the economic recovery is likely to outweigh the risks of inflation in the MPC's views on monetary policy in the near future.

Sources:
ONS: GDP Release Bank of England: Public lecture given by Adam Posen at the London School of Economics

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Inflation Hits New Highs 19th May 2010

Bank of England The latest UK inflation figures, published yesterday by the Office of National Statistics (ONS), showed that consumer price inflation (CPI) for April 2010 was 3.7% in April, up from 3.4% per cent in March. The main areas causing the increase were clothing, food, alcohol and tobacco.

For the same period, Retail Price Inflation (RPI) reached 5.3% (the highest since July 1991), up from 4.4% per cent in March. The main additional factor impacting RPI was mortgage interest payments which increased by 0.6% this year but fell by 7.7% last year following the cut in the Bank rate from 1% to 0.5% in March 2009.

The ONS report also commented on how inflation in the UK compares with our European counterparts. The CPI shows that the UK inflation rate in March at 3.4% was above the provisional figure for the European Union of 1.9%.

The Monetary Policy Committee minutes for May 2010, published this morning by the Bank of England, showed that inflation continues to be a key factor in the committee's decision making. However, it is not the overriding factor. Implications of other economic data, i.e. the extent of the economic recovery, and the "turbulent developments in the days before the Committee's decision" carried greater weight.

"Although the Committee judged that the risks to activity and inflation in the near term had increased, it was too early to assess with confidence the overall impact of recent developments on the medium-term outlook. Some of the present uncertainties should be reduced by the time of future meetings. All Committee members agreed that the overall outlook for inflation implied by the Inflation Report projections warranted leaving policy unchanged."

It therefore now looks increasingly likely that official rates will remain at 0.5% for the rest of 2010.

Sources:
ONS: Inflation report Bank of England: MPC May 2010 minutes

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