The recovery in global activity continued, although the pace of growth slowed and vulnerabilities, especially within the euro area, increased. In the United Kingdom, the squeeze in households’ real incomes is likely to continue to weigh on domestic demand, especially over the next year or so.
But expansionary monetary policy, prospective growth in global demand and the current level of sterling should mean that, after some near-term weakness, GDP growth gradually picks up.
CPI inflation is set to rise further in 2011, boosted by increases in utility prices. Inflation is likely to fall back through 2012 and into 2013 as the impact of the factors temporarily raising inflation diminishes and downward pressure from slack in the labour market persists.
But the precise timing and extent of that fall are highly uncertain.
Under the assumptions that Bank Rate moves in line with market interest rates and the stock of purchased assets financed by the issuance of central bank reserves remains at £200 billion, the chances of inflation being above or below the 2% target in the medium term are judged to be roughly equal.
Nick Hopkinson, Director of property company PPR Estates, said:
“High Inflation continues to ‘surprise’ the Bank of England policy makers in a way that ‘accidentally’ helps reduce the national debt.
"Regardless, their hands are completely tied as we cannot afford more quantitative easing and interest rate rises are totally out of the question while UK PLC’s GDP growth rates remain so anaemic.
"Amongst other things, higher fuel bills hitting the doormats this month will only add more financial stress to many struggling households. With economic ‘headwinds’ likely to reach gale force I fear we are looking at further falls in house prices and mortgage lending over the rest of this year.”
Max Johnson, broker at the forex specialists Currency Solutions, commented:
"In just a few pages of data, this latest quarterly inflation report paints a bleak picture: an economy with gloomy prospects and a central bank with an almost impossible task.
"Once again the Bank of England has downgraded the UK's growth forecast. And rightly so: after nine months of stagnation, the economy is stubbornly refusing to pick up.
"The hoped for export-led recovery has failed to materialise. Even though the weak Pound has kept British goods cheap, our main customers in the Eurozone and the US have had their own problems and simply haven't been buying. There are no signs whatsoever that this will change in the short and even medium term as the global debt problem metastasises.
"It was telling that Mervyn King placed much of the blame for the British economy's poor performance on global factors. There is a good deal of truth in this, but it's also true that our own economy is at best listless.
"Even though inflation is more than double the Bank's target rate, it has had to abandon any hope of keeping inflation in check. It is resigned to it reaching 5% by the end of the year.
"Its main inflation-fighting weapon, interest rates, will stay firmly in the holster until late next year, as the Bank dares not put up rates and risk choking off the already sputtering economy.
"So while the Bank is condemned to more chasing of its own tail, prospects for the economy and the Pound look sombre.
"While weak, Sterling is at least stable. With so much volatility bedevilling other currencies, Sterling can take some solace in its image as a somewhat dull safehaven currency. Given the depth of the crisis at home, that says a lot about the extent of the problems overseas.
"In the immediate aftermath of Mervyn's speech, the Pound fell but then rose again as investors put the UK's position into perspective. It's bad here, but not as bad as across both the Channel and the Atlantic."
