In the United Kingdom, CPI inflation rose further above the 2% target while output fell. Output was,however, temporarily affected by the heavy snowfall at the end of 2010 and growth appears likely to resume.
The world economy grew further, although vulnerabilities remain. Expansionary monetary policy, combined with further growth in global demand and the past depreciation of sterling, should ensure that the recovery in the United Kingdom is maintained. But the continuing fiscal consolidation and squeeze on households’ purchasing power are likely to act as a brake.
After some near-term weakness, GDP growth is judged to be about as likely to be above as below its historical average rate. Even so, the depth of the recession means that some spare capacity is likely to persist over the forecast period.
CPI inflation is likely to pick up to between 4% and 5% in the near term and to remain well above the 2% target over the next year or so, reflecting in part the recent increase in VAT. The near-term profile is markedly higher than in November, largely reflecting further rises in commodity and import prices since then.
Further ahead, inflation is likely to fall back, as those effects diminish and downward pressure from spare capacity persists. But both the timing and extent of that decline in inflation are 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 either above or below the target in the medium term are judged to be broadly balanced.
