Inflation is set to remain high in
the short-term while the UK economy remains weak and its recovery hangs on
world events, the Bank of England has said.
The Bank’s Governor Mervyn King
stressed that prospects for price pressures and growth were highly uncertain,
but predicted that the CPI rate of inflation would fall to 1.6 per cent in two
years’ time if interest rates rise gradually.
He added that a series of looming
big risks to the economy could affect the outlook, a key one being any
“bad news from the world economy and in particular the euro area”.
As 60 per cent of UK exports go to
the euro area, which is not currently the most buoyant of markets, it was
important for Britain to better exploit opportunities to trade with emerging
economies, Mr King said.
The Governor’s comment came as he
set out his assessment of the state of the British economy and delivered his
quarterly inflation report.
Inflation is running at 3.1 per
cent, above the 2 per cent target set by the Government.
And the Bank warns of a
sharper-than-expected rise in the cost of living over the coming months due to
a combination of soaring commodity costs, energy bill hikes and the impending
rise in VAT as well as the impact of a weak pound.
Mr King stressed that the Bank
would keep pushing to maintain inflation as close as possible to 2 per cent,
whatever path the economy took.
“Like the English batsmen
preparing to defend the Ashes, watching carefully and perfectly balanced in the
crease ready to play forward or back according to the length of the incoming
delivery, so the MPC will watch the incoming data carefully,” he said.
Although the strength of the
recovery was uncertain, the Bank Governor said he was not expecting a sudden,
sharp slowdown.
Mr King said he believed the
private sector should be robust enough to offset Government cuts, having
created a net 250,000 jobs already in the past year.
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