The prospects for the UK economy have worsened. Global demand slowed. And concerns about the
solvency of several euro-area governments intensified, increasing strains in banking and some
sovereign funding markets. Household and business confidence fell, both at home and abroad.
These factors, along with the fiscal consolidation and squeeze on households’ real incomes, are
likely to weigh heavily on UK growth in the near term. Thereafter, the recovery should gain traction,
supported by continued monetary stimulus and a gentle recovery in real incomes. Implementation
of a credible and effective policy response in the euro area would help to reduce uncertainty and so
support UK growth, but its absence poses the single biggest risk to the domestic recovery.
CPI inflation rose to 5.2% in September. Inflation is likely to fall back sharply through 2012 as the
contributions of VAT, energy and import prices decline, and downward pressure from slack in the
labour market persists. But how far and how fast inflation will fall are uncertain. Under the
assumption that Bank Rate moves in line with market interest rates and the size of the asset
purchase programme remains at £275 billion, inflation is judged more likely to be below than above
the 2% target at the forecast horizon.
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