BANK of England Governor Sir Mervyn King has highlighted the likelihood of a boost to North Sea oil output over the next two years, but warned again that the UK will not enjoy a "typical" economic recovery.
Sir Mervyn cited a likely short-term uptick in North Sea production, on the back of investment fuelled by tax changes, as he unveiled the Bank of England's latest quarterly growth and inflation projections yesterday.
He noted that, for the first time since before the financial crisis, he was able to declare the Bank's projections for growth were a little stronger and its forecasts for inflation a little weaker than in the previous quarterly report.
However, the Bank cautions in its overview that UK recovery "remains weak and uneven".
Setting out the view of the Bank's Monetary Policy Committee, the inflation report states: "The legacy of adjustment and repair left by the financial crisis means that the recovery is likely to remain weak by historical standards."
Detailing his expectations of North Sea output, Sir Mervyn said: "There have been tax changes made prior to last year which have led now to an increase in investment, which will produce more North Sea output in the next couple of years.
"So, although there is a long-term downward trend of North Sea oil (production), we will see some recovery in the next couple of years. That will both make the trade deficit look better and reveal that the underlying growth of (economic) output was not quite as negative as it might have looked last year, and we'll see that coming through later this year."
However, while highlighting the slight upgrading by the Bank of its growth forecasts and modest lowering of its inflation projections, he warned: "This is no time to be complacent. We must press on to ensure a recovery and to bring down unemployment. This hasn't been a typical recession and it won't be a typical recovery."
But Sir Mervyn, presenting his last inflation report as Bank Governor, did believe a recovery was "in sight".
UK base rates have been at an all-time low of 0.5% since March 2009. Annual U K consumer prices index inflation stood at 2.8% in March.
Looking further ahead, Sir Mervyn said the "real challenge" was to navigate a way back to positive real interest rates.
He added: "When interest rates are back to that level, then you would expect to see some consequences for asset prices, possibly falls in asset prices. And at that point ,it will be important that people have had time to deleverage.
"Once the economy improves, then it may be possible to raise rates sooner than the current market expectation."
Samuel Tombs, UK economist at consultancy Capital Economics, noted the MPC had raised its forecast for UK gross domestic product growth in 2013 from 0.9% to 1.1%, with the projections for 2014 and 2015 nudged up from 1.8% to 1.9% and from 2% to 2.2% respectively.
He added: "Despite this, the inflation forecast was lowered, perhaps by more than had been widely expected. The MPC now expects CPI inflation to peak at 3.1% in the third quarter, rather than 3.2%. And it now expects inflation to be at, rather than above, the 2% target at the two-year horizon."
However, he declared: "We doubt the economic recovery will live up to the MPC's expectations.
"And we continue to think that spare capacity in the economy will have a bigger downward effect on inflation than the MPC anticipates, dragging inflation a fair way below its target by the end of next year."
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