The Bank of England said the U.K. growth is set to remain subdued with headwinds blowing from the Eurozone debt crisis, leaving room open for more stimulus. Moreover, inflation is judged to take more time to return to its target than estimated three months ago.
In its quarterly Inflation Report released on Wednesday, the central bank said the prospects for U.K. growth remain unusually uncertain. Governor Mervyn King said the economy will continue to face headwinds during the forecast period.
"We are navigating through turbulent waters with the risk of a storm heading our way from the continent," King said at the press conference held to present the report.
According to him, the challenges within the euro area is the single biggest threat to the U.K. recovery. He reiterated that the path of recovery is likely to be slow and uncertain.
Growth will be held back by fiscal squeeze, tight credit conditions and slow global recovery. King expressed worries about the risk of a "disorderly outcome" from Eurozone.
Gross domestic product growth is seen at around 2.6 percent in two years' time. The estimate is weaker than than the 3 percent expansion estimated in February. King said the central bank's asset purchases will continue to support demand.
Policymakers refrained from boosting the size of the asset purchase program this month. The central bank increased its asset purchase programme by GBP 50 billion in February to the current GBP 325 billion.
Inflation is estimated to be around 1.6 percent in two years time, compared to the previous projection of 1.8 percent.
Capital Economics Economist Vicky Redwood said she doubts that the trade-off between growth and inflation has deteriorated as much as the Monetary Policy Committee's appears to believe.
The central bank sees uncertain prospects for inflation. Inflation is expected to remain above the 2 percent target for the next year or so.
However, a gradual easing in the impact of external price pressures, together with a continuing drag from economic slack, should lead inflation to fall back to around the target, the report said.
"... the risks of inflation being above or below the target by the end of the forecast period are judged to be broadly balanced," it added.
IHS Global Insight's Chief U.K. Economist Howard Archer said the Inflation Report does not give a strong indications either way as to whether or not more quantitative easing will occur. The economist suspects that the bank would prefer not to do more QE, but is prepared to act if underlying economic activity fails to improve.
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