Bank of England policymakers lifted the inflation forecast on Wednesday after expanding quantitative easing last week. As the economy faces substantial headwinds, the central bank expects the recovery path to be slow and uncertain.
Inflation is likely to undershoot the 2 percent target in two years, the U.K. central bank said in its Inflation Report, released today.
"Inflation is judged somewhat more likely to be below the target than above it for a good part of the forecast period," the report said.
The rate of price growth is expected to fall sharply at the start of 2012 as the impact of past rises in the value added tax and petrol prices drop out of the annual comparison. It is set to continue falling as the upward pressure from external costs diminishes and spare capacity continues to weigh on wages and prices, the bank said.
Inflation is estimated to slow to 1.8 percent in two years, not as low as the prior estimate of 1.3 percent. The economy is now forecast to grow at around 3 percent in two years.
The forecasts are based on the the assumptions that Bank Rate moves in line with market interest rates and the size of the asset purchase programme remains at GBP 325 billion.
The record-low benchmark interest rate is set to remain at the current 0.50 percent until 2014. "Moving to a world of steady growth, inflation close to our 2 percent target, and a more normal level of interest rates, will take time," Bank of England Governor Mervyn King said.
Any hike in the interest rate now would turn the 'gradual recovery' into a recession, he warned.
"There is a limit to what monetary policy can achieve when real adjustments are required," King said. "But with falling inflation, and the prospect of an end to the squeeze in real incomes leading to a recovery in growth, we are moving in the right direction."
GDP growth is likely to remain weak in the near term, the central bank assessed. According to the bank, the major threat to the domestic recovery comes from challenges faced by the euro area. Moreover, tight credit conditions and fiscal consolidation are likely to act as a drag on domestic spending.
"The path of recovery is likely to be slow and uncertain," King said at a press conference. "For much of this year, there is likely to be a 'zigzag' pattern of alternating positive and negative quarterly growth rates," he added.
Last week, the central bank decided to pump an additional GBP 50 billion into the economy over the coming three months, amid slowing inflation.
Howard Archer, Chief UK Economist at IHS Global Insight said the report contains a modest further bias towards further monetary policy easing. He added that inflation forecasts do imply that the BoE has scope to undertake limited further quantitative easing.
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June 12, 2026 17:14 ET Major central bank action was the focus this week in economic news. The European Central Bank became the first major central bank to move in response to the rising inflationary pressures in the backdrop of the conflict in the Middle East. In North America, the U.S. inflation and trade data as well as Canada’s central bank decision gained attention. The Chinese trade data was the main news in Asia.