• Little hard evidence of a marked slowdown in UK aggregate demand
Henk Potts, Equity Strategist at Barclays Stockbrokers comments: “The Monetary Policy Committee is caught between a slow growth rock and a high inflation hard place. UK economic growth is clearly moderating; consensus forecasts are for growth of just 1.6% this year compared to the 3% expansion recorded in 2007. However, outside the housing market and survey data, there is little hard evidence of a marked slowdown in UK aggregate demand.
“Headline inflation is likely to remain elevated for most of 2008, while CPI inflation is currently running at 2.4% and is set to move higher over coming months thanks to higher energy prices and the recent depreciation of sterling. However, it should start to moderate into 2009 as the softer growth backdrop reduces capacity pressures in the economy, and commodity price inflation wanes.
“Despite the upside risk to inflation, we expect the Bank of England to reduce interest rates gradually over the coming quarters, with rates finishing the year at 4.25%.”