Insider Media Limited

The Bank of England should keep open the possibility of adding to its quantitative easing (QE) programme. That's the view of David Kern, chief economist of the Coventry-based British Chambers of Commerce (BCC). He spoke after the bank forecast an inflation rise to about 3.5 per cent in the run-up to Christmas with it remaining at more than 3 per cent in the first half of 2011.

Inflation is then due to ease back and slide below the 2 per cent target through 2012.

The bank said UK growth is expected to be "broadly similar" to that forecast in the August report, with the recovery looking to have peaked in the second half of this year. It is then due to fall back to about an annual rate of 2.5 per cent in 2011 before gradually picking up to just over 3 per cent in late 2012.

Kern said: "The new 'Inflation Report', and subsequent comments by the bank governor (Mervyn King), suggests that the Monetary Policy Committee (MPC) is expecting inflation over the next two years to be higher than they predicted in August, and growth to be slightly higher than the historical average. On the basis of this assessment, the prospect of an early increase in QE has diminished.

“However, due to the risks facing the economy, we believe it is important for the MPC to keep the possibility of adding to the QE programme under active consideration, while keeping interest rates at very low levels for an extended period.

"The growth forecast in the Inflation Report could be over-optimistic in our view, and may not fully take into account the negative effect that the government’s deficit cutting plan will have on the economy. Businesses and consumers will face serious pressures in the months ahead, and it is important to ensure that risks of a downturn are averted as a matter of priority.”